Commodity trading advisers, known as CTAs, and trend-following funds finally enjoyed a month to boast about.
The major indexes that track these funds, as well as most of the individual funds themselves, posted a profit for October. As a result, the average fund is moving closer to profitability for the year.
The Newedge CTA Index rose 1.29 percent in October, cutting its loss for the first ten months to 1.43 percent. The Newedge Trend Index climbed 2.74 percent last month, reducing its loss for the year to just 0.49 percent.
Perhaps the best performer among the large, well-known funds is David Harding’s Winton Futures Fund, the flagship fund from his London-based firm, Winton Capital Management. The nearly $10 billion fund gained 3.21 percent in October, bringing its gains for the first ten months to 6.65 percent. The biggest reason is that it has attached itself heavily to the ferocious bull market in global equities. Indeed, the Winton Global Equity Fund returned 4.16 percent last month and is now up nearly 25 percent for the year. The flagship fund’s gains largely came from individual equities and equity indexes, which now account for 25 percent of the fund’s risk, up from 20 percent earlier in the year, according to a person with knowledge of the fund’s performance.
In fact, earlier this week the firm disclosed it had $8.3 billion invested in U.S. equities at the end of the third quarter. This was roughly in line with what it had the prior quarter but was up about 50 percent, from $5.5 billion, from the end of the first quarter.
Systematic CTAs use computer programs to ferret out scores of futures contracts and hundreds or even thousands of stocks. CTAs then typically lock themselves into following specific rules. Some of the models track trends of minutes or days, while others look for trends over several weeks, months or even in some cases years. They may trade instruments as varied as ten-year bonds, S&P stocks, coffee and the Brazilian real.
Most other high-profile CTA and trend-following funds also made money in October. Graham Capital Management’s Graham Global Investment Fund - K4D-10V program gained 1.73 percent last month through October 29, putting it up 5 percent for the year. The Rowayton, Connecticut–based firm’s Graham Global Investment Fund - K4D-15V program — which is more volatile — returned 2.61 percent last month through October 29 and is up 7.51 percent for the year. The K4D program is a systematic program that uses multiple computerized trading models and trades in roughly 80 to 90 global markets.
Other large funds were up in October but are still in the red for the year. For example, London-based BlueCrest Capital Management’s BlueTrend fund rose about 1 percent in October, trimming the fund’s loss for the year to a little more than 11 percent. London-based Man Group’s flagship fund, Man AHL Diversified, gained more than 6 percent last month and is now down 3.5 percent or so through October. The Aspect Diversified Program, managed by London-based firm Aspect Capital, rose 1.93 percent in October, trimming the fund’s loss for the year to 6.3 percent. This is only its second profitable quarter in the past six months.
The CCP Quantitative Fund - Aristarchus Program, managed by Cambridge, England–based investment firm Cantab Capital Partners, also made money last month. However, the managers of the diversified, multimodel systematic managed-futures program are still anxious for the year to end. The strategy gained 1.89 percent in October — its second straight profitable month — but is still down 24.86 percent for the year.
The losses among many of these funds are especially stark compared to how the equity markets are faring. In fact, industry tracker eVestment calculates that if you remove systematic strategies from its hedge fund composite figures, the average hedge fund would be up closer to 12 percent this year, instead of being up about 7 percent.
CTAs and trend followers historically appeal to investors precisely because they generally have no correlation to the stock market. They fared especially well in 2008, with many of them generating double-digit returns while many of their stock-oriented peers lost between 20 percent and 50 percent that year.
However, these days, investors have been hard-pressed to find sustained trends, except in the stock market. “It is now a macro-driven environment,” says Donald Steinbrugge, managing partner at Agecroft Partners, a Richmond, Virginia–based hedge fund consultant. He says investors are more reacting to whether or not the Federal Reserve Board will tighten monetary policy or how shaky the economic environment is in countries like Greece and Italy.
“You need to look at them over 30 years,” adds Steinbrugge, speaking on the sidelines at the recent Hedgeopolis conference in New York City. “The fact they are not doing well for the past three years may mean it is time to buy them.” He adds that CTAs and trend followers historically do very well coming out of a large drawdown, noting that this year more investors are adding risk. “They forget about 2008,” he says.
Indeed, the chief investment officer for an endowment told the audience at Hedgeopolis that he has no plans to alter his exposure to managed-futures funds such as CTAs and trend followers, which is now 10 percent of the hedge fund portfolio. “I like the strategy,” he said. “It is the only strategy that has negative correlations. The only downside is the volatility and drawdowns, which make it painful right now.”
However, he cautions investors who are mulling jumping into the strategy simply because it has not done well. When it comes to systematic investing, it is not a matter of whether or not it is out of favor, like, say, investing in financial stocks.
“If there are persistent trends, they will capture it,” the CIO says. “If the trends reverse abruptly, they will lose money.”
