So much for CTAs and trend followers making money when the stock markets drop.
At least that’s what these self-styled non-correlated hedge funds wanted us to believe. As most stock-oriented funds continued to ride the five-year bull market, managers and boosters of strategies that seek out commodities, currencies and other non-stock related instruments — many of whom use computer models to identify sustained trends — continued to lose money or barely eke out gains.
These managers repeatedly stress that their strategies are designed to barely resemble the performance of stocks, and they often point to 2008, when CTAs and trend followers surged while most other strategies lost money, in some cases huge sums.
So when the Dow dropped 5.3 percent and the S&P 500 fell 3.6 percent in January, did CTAs and trend followers finally make money? Did they vindicate their claims?
For the most part, no. Last month, the NewEdge CTA Index fell 2.30 percent, while the Trend Index dropped 4.45 percent. And many of the high profile funds fared nearly as poorly.
Sure, this is just one month. And we need to see what happens if the stock market struggles for a longer period of time. But the January performance was not pretty.
What went wrong last month? The over-riding problem is that it was a trendless month. In fact, January was characterized by sharp reversals in major markets in the middle of the month. For example, after getting off to a fast start, the equity markets changed directions midway through the month and wound up losing money in January.
Other markets similarly flip-flopped during the month. Ten-year Treasury yields rose earlier in the month and then fell from their highest levels in 2.5 years.
The Japanese yen — which many trend followers, macro investors and multi-strategy funds as well as others were heavily shorting — unexpectedly strengthened from its lowest levels versus the U.S. dollar since 2008. Meanwhile, the S&P GSCI Index, which tracks commodities prices, fell 1.6 percent in January after dropping even further earlier in the month.
As a result, the MAN AHL Diversified fund, managed by London—based Man Group, lost 1.50 percent in January. Remember, it had already lost money for three straight years and four of the past five years.
The Aspect Diversified Program, managed by London—based Aspect Capital, fell 5.64 percent after losing 4.46 percent last year.
The CCP Quantitative Fund - Aristarchus Program, managed by Cambridge, UK—based Cantab Capital and which plunged 27.66 percent last year, dropped 6.90 percent in January. In fact, it is down more than 13 percent in the past two months alone.
London—based BlueCrest’s BlueTrend fund lost a little more than 4 percent in January after suffering its first annual decline in its history.
Even funds that made money in 2013 were in the red in January. For example, London—based Winton Capital’s Winton Futures Fund fell 2.38 percent after posting a 9.42 percent gain last year.
Keep in mind that Winton has been more heavily exposed to the equities markets than most trend followers and computer-driven funds. Indeed, in January the Winton Global Equity Fund — a long-only equity fund — lost 3.38 percent.
BaltimoreCampbell’s Flagship Managed Futures Program, which rose more than 12 percent last year, lost 2.45 percent in January.
Baltimore—based Campbell & Co.’s trend-following strategies incurred losses due to the sharp reversal in the equity sector, according to people familiar with the portfolio. However, non-trend strategies mitigated losses, with gains in three of four sectors, led by fixed income and foreign exchange. Equities were said to be marginally profitable while commodities were down.
On the other hand, Campbell’s Prism Program, which consists entirely of non-trend strategies, gained 1.4 percent in January. It also was positive in three of four sectors. Equities were flat, fixed income and foreign exchange were positive and commodities were negative.
The upshot: For at least one month, the CTAs and trend followers did not deliver when stocks sagged.
