Savage inventory market drops, hovering rallies and a frenzied retail buying and selling increase. This ought to be a fertile atmosphere for quantitative trend-following hedge funds. As a substitute, the $280bn trade has skilled extensively diverging fortunes this 12 months.
Société Générale’s index of commodity-trading advisers — a standard regulatory designation for “quant” funds that concentrate on using market tendencies — is down 2.2 per cent this 12 months. That’s under the hedge fund trade’s common 2 per cent acquire, based on HFR, and masks some stark variations between trend-followers.
This 12 months has been a “crucible” for CTAs, based on Edward Raymond, head of UK portfolio administration at Julius Baer. “It’s the anatomy of the downturn that issues,” he stated. “Some did effectively and others didn’t, and we’ve seen a large dispersion of efficiency this 12 months.”
Facet Capital, Millburn and Winton Group are down about 7 per cent, 12 per cent and 17 per cent respectively, based on numbers despatched to traders and seen by the FT.
In distinction, Roy Niederhoffer’s Diversified Fund and the Tewksbury Funding Fund have gained roughly 44 per cent and 18 per cent. Man AHL’s development funds are up three to four per cent, whereas different huge gamers — akin to AQR — have trodden water.
The disparity is partly defined by the swiftness and depth of the market drop after which restoration, as trend-followers naturally endure to some extent in abrupt modifications in market momentum.
But two elements have additionally caught out: whether or not they branched out into different quant buying and selling methods, and whether or not funds reacted rapidly to market strikes or checked out longer-term patterns.
Though many hedge funds have been rattled this 12 months, the efficiency of trend-followers is of explicit significance. Because the monetary disaster they’ve change into widespread amongst many pension funds, personal banks and endowments as a sort of insurance coverage coverage towards downturns — because of earlier sturdy performances at occasions of turmoil, akin to in 2008. Understanding the explanations for the combined outcomes of 2020 is subsequently very important for a lot of institutional traders.
“There’s all the time some dispersion within the trade, however there’s definitely an uncommon quantity of it this 12 months,” stated Sushil Wadhwani, the chief funding officer of QMA Wadhwani, a hedge fund group.
That is fairly a shift from 2008, when most trend-following hedge funds profited from large, sustained falls in shares and oil, and a bond rally. The primary differentiator was simply how effectively they did. The SocGen CTA index climbed 13 per cent the 12 months the monetary disaster wracked markets.
However the aftermath was harder. “Life started to get harder for us and all trend-followers when rates of interest went to zero and volatility fell,” stated David Gorton of DG Companions, which runs a trend-following fund in a three way partnership with Brevan Howard, that’s up 5.four per cent this 12 months.
The poor run meant some trend-followers began drifting from their core technique in recent times, dabbling with new alerts and strategies, based on Mr Gorton. That price them when conventional trend-following loved a renaissance and plenty of different methods struggled this 12 months, he argued.
An instance of the price of this technique drift is the woes of Winton, as soon as one of many highest-profile trend-following hedge funds, which publicly shifted into different strategies akin to buying and selling primarily based on macroeconomic information.
This 12 months Winton’s predominant fund is down 17 per cent, whereas its smaller, purer trend-following fund is up about three per cent. “The issues we’ve diversified into have carried out worse than trend-following. However I don’t essentially assume it reveals I received it flawed,” stated David Harding, Winton’s founder.
Some trade executives disagreed that including various methods has led to weak efficiency. Mr Wadhwani stated his firm has benefited massively from non-trend methods, akin to incorporating a heavy dose of “macro” investing, by way of faster and extra correct forecasts of financial progress and inflation charges. “It’s actually what saved our fund” within the lean years, he stated. QMAW’s Pattern Plus Technique is up 5.four per cent this 12 months.
Leda Braga, the top of Systematica — whose BlueTrend fund is up about 5 per cent this 12 months — reckons a drift away from trend-following is probably going a motive behind at the very least among the muddled efficiency of many CTAs this 12 months. However she argued that whether or not managers checked out market patterns over quick or very long time durations can be a significant differentiator.
Most CTAs usually use methods that final a number of months. Whereas some may solely maintain positions for a number of days, that is territory that has change into much less worthwhile and dominated by different higher-speed hedge funds and market-makers.
But these faster-changing methods normally “work effectively with a fast fall in markets,” akin to in 2020, stated Sandy Rattray, chief funding officer at Man Group, which manages $108bn in property.
This 12 months’s unstable circumstances underscore the necessity to regularly enhance on trend-following techniques somewhat than drifting too removed from the core technique, based on Ms Braga.
“We don’t declare to have discovered the Holy Grail. We now have to repeatedly be taught and adapt our algorithms to manage higher, enrich our fashions and put together them for regime modifications,” she stated.