Asymmetric Returns and Sector Specialists
Asymmetric Returns and Sector Specialists is an interesting paper written by Alexander Ineichen in The Journal of Alternative Investments (2003). An abstract:
Returns from long-only exposure to equity and bond markets are fairly symmetrical. However, investors prefer asymmetrical returns over symmetrical returns as they prefer gains over losses and are averse to large drawdowns. Symmetric returns can be achieved through passive investment vehicles whereas asymmetrical returns require active risk management whereby risk is defined in absolute terms. This article examines asymmetric returns of long/short hedge fund managers who specialize in one sector only.
I made bold the comments I liked best. We could argue that the most recent full market cycle, or decade for that matter, did not represent a symmetric return profile from passive indices. Instead, I will suggest that the return profile from passive indices has been negative asymmetry: a distribution with more downside loss than total return. For example, the popularly quoted S&P 500 stock index has no return for a decade, but two magnificant declines of -50% or more along the way.
Source: http://www.iijournals.com/doi/abs/10.3905/jai.2003.319070
The Journal of Alternative Investments
Spring 2003, Vol. 5, No. 4: pp. 31-40
DOI: 10.3905/jai.2003.319070
