🤖 AI Summary
Traditional risk metrics struggle to capture the structural fragility of systematic investment strategies under shifts in market regimes. This study proposes a “Minimum Regime Performance” (MRP) framework that, for the first time, quantifies strategy decay risk as a measurable indicator by evaluating the lowest risk-adjusted return a strategy achieves across distinct historical market regimes. By delineating historical regimes and conducting cross-regime performance analysis, the research validates the efficacy of MRP across a broad sample of factor-based strategies. The findings reveal a trade-off between long-term Sharpe ratios and strategy resilience, offering investors a practical tool to identify and manage the risk of performance deterioration stemming from regime transitions.
📝 Abstract
Systematic investment strategies are exposed to a subtle but pervasive vulnerability: the progressive erosion of their effectiveness as market regimes change. Traditional risk measures, designed to capture volatility or drawdowns, overlook this form of structural fragility. This article introduces a quantitative framework for assessing the durability of systematic strategies through minimum regime performance (MRP), defined as the lowest realized risk-adjusted return across distinct historical regimes. MRP serves as a lower bound on a strategy's robustness, capturing how performance deteriorates when underlying relationships weaken or competitive pressures compress alpha. Applied to a broad universe of established factor strategies, the measure reveals a consistent trade-off between efficiency and resilience -- strategies with higher long-term Sharpe ratios do not always exhibit higher MRPs. By translating the persistence of investment efficacy into a measurable quantity, the framework provides investors with a practical diagnostic for identifying and managing strategy-decay risk, a novel dimension of portfolio fragility that complements traditional measures of market and liquidity risk.