Free Your Alpha. Keep Your Trend.

Introduction

Trend-following strategies have long been considered a cornerstone of strategic allocations. They are valued for their ability to deliver diversification in moments of market stress and to provide convex payoffs when traditional assets stumble. Yet, many allocators find themselves frustrated. When accessed through classic, fully funded fund investments, trend can feel expensive in terms of capital, underwhelming in sideways markets, and costly in terms of foregone opportunities.

But what if we thought differently about how to access trend? Instead of tying up scarce capital in a funded CTA allocation, investors can make use of more capital‑efficient tools—overlaying trend exposure via swaps while redeploying freed capital into true alpha opportunities. With instruments like the RQT Index, allocators can preserve the diversification benefits of trend while simultaneously integrating their best alpha sources, creating a tighter alignment between top‑down portfolio policy and bottom‑up alpha generation.

The allocator’s dilemma

The strategic case for trend following is not in doubt. It offers protection in extended downturns, diversification when equities and bonds falter, and systematic exposure to global macro trends. That is why many investors hold it as a permanent sleeve within their strategic asset allocation.

The problem lies in the implementation. Fully funded allocations tie up capital in strategies that typically hold most of their assets as collateral. Performance can also frustrate: while trend excels in big directional moves, it struggles in choppy or mean‑reverting markets, leaving allocators underwhelmed. And every dollar locked up in a CTA fund is a dollar that cannot be allocated to higher‑dispersion alpha strategies. The result is a recurring question: how do we retain the benefits of trend without sacrificing scarce capital?

Portable alpha as a new lens

A practical answer lies in reframing trend. It is not a scarce, manager‑specific alpha that requires fully funded exposure. Rather, it is a systematic, persistent source of return—replicable across time, markets, and managers. Some may prefer to call it alternative beta, others might argue it represents systematic alpha when engineered thoughtfully through diversified and convexity‑aware implementations. In either case, the implication is the same: trend can be ported into the portfolio more efficiently.

Through portable alpha structures, allocators can maintain their desired strategic trend exposure synthetically—using swaps or other derivative overlays—while reserving cash for true alpha strategies such as relative value, equity market‑neutral, or event‑driven. This simple change transforms trend from a capital sink into a capital‑efficient overlay, freeing investors to direct their marginal dollars where they believe skill has the greatest payoff.

Capital‑efficient implementation: the role of RQT

The RQT Index provides a practical way to put this concept into action. Built from live, transparent bank QIS trend‑following indices, it is inherently designed for overlay delivery via total return swaps. Its construction emphasizes convexity, selecting components with positive skewness so that the diversification benefits investors expect from trend are more reliably realized.

RQT can act both as a benchmark—a clear reference point for trend exposure—and as an implementation tool, delivering the exposure capital‑efficiently. By porting trend exposure through RQT, allocators preserve the role of strategic diversification while freeing capital for higher‑conviction alpha.

Case study: from funded to portable

Consider a simple strategic allocation: 30% Trend (benchmarked by RQT Index), 30% Relative Value (HFRI Relative Value), and 40% Event Driven (HFRI Event Driven). The portfolio relies on Trend for diversification but tha allocator is disappointed by its realized alpha. At the same time, the allocator sees more attractive opportunities in Relative Value and Event Driven.

Through a portable alpha structure, the allocator divests the funded Trend sleeve and enters a total‑return swap on RQT, keeping the strategic trend exposure intact. The freed capital is redeployed—10% is retained in cash for liquidity, while the remaining 20% is reallocated pro rata to Relative Value and Event Driven. The cost of the swap is assumed to be a modest 10 bps per annum, included in all results.

Cumulative return chart comparing SAA Classic vs. SAA Portable

Summary statistics (net of 10 bps assumed swap cost):

The results are telling. Annual returns rise by 1.6 percentage points, with improvements in both Sharpe and Sortino ratios. Cumulative returns are nearly 28 percentage points higher, even after swap costs. Equity alpha improves meaningfully, as freed capital is redeployed into more fertile alpha sleeves. The trade‑off is a modest increase in volatility and somewhat deeper drawdowns, the natural consequence of doing more with the same capital. Tail properties remain broadly similar, with only a slight increase in kurtosis.

For allocators, the message is clear: portable trend delivers more efficient use of capital without abandoning the strategic diversifier.

Governance and practicalities

Implementing overlays requires discipline. Exposure should be sized to a defined volatility or tail‑risk budget. Margin and liquidity policies must be in place, with stress testing for gap risks. Interaction between sleeves should be monitored to ensure that alpha strategies remain diversifying. Reporting must clearly attribute performance across core, overlay, and alpha components. With these safeguards, overlays can be both effective and defensible at the investment committee level.

Conclusion

Allocators no longer have to choose between keeping their strategic diversifier and funding true alpha. By porting trend into portfolios via a capital‑efficient overlay like the RQT Index, investors preserve the protection of trend while freeing capital to pursue the best alpha opportunities. The result is a portfolio that is at once strategically diversified and opportunistically positioned.

Keep your trend. Free your alpha.