Measuring Strategy-Decay Risk: Minimum Regime Performance and the Durability of Systematic Investing

Paper: arXiv 2604.08356

Authors: Nolan Alexander, Frank Fabozzi

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.

Complexity vs Empirical Score

• Math Complexity: 4.5/10
• Empirical Rigor: 6.0/10 (capped from 6.8: no out-of-sample test; see penalty flags)
• Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper introduces a compelling conceptual framework for strategy decay using Minimum Regime Performance (MRP), backed by solid empirical factor testing. While mathematically accessible rather than deeply theoretical, its practical focus on regime robustness provides valuable, novel insights for portfolio management.

Research Flowchart

  flowchart TD
    A[Research Goal: Measure Strategy-Decay Risk & Durability] --> B[Data Input: Historical Returns of Factor Strategies]
    B --> C[Segment Data into Distinct Market Regimes]
    C --> D[Calculate Minimum Regime Performance MRP]
    D --> E[Evaluate Long-Term Sharpe Ratio vs. MRP Trade-off]
    E --> F[Outcome: Quantified Strategy Robustness & Decay Diagnostics]