Trends Come Back to Surprise Investors

Chidem Kurdas

It’s a common pattern. No sooner than a view solidifies into conventional wisdom, it turns out to be wrong. So it was with 2014’s top hedge fund strategy.

This is a strategy where the investment products are not “funds” but “programs” or “pools.” The practitioners are not portfolio managers— they are called commodity trading advisors, though mostly they trade stock or interest rate futures and many have nothing to do with agricultural or extractive commodities.

Collectively they may be referred to as CTAs or managed futures. Though they pursue a variety of ideas, they are known widely for trend following, that is, using computer algorithms that identify persistent market movements. Whether the trend is up or down does not matter in the least as long as it persists long enough in one direction to be traded on.

Trend followers performed poorly in the past three years and looked lackluster in the first half of 2014. Investors moved money away from them. The larger firms were subject to snarky news headlines announcing their pathetic state and the lack of trends to make money from.

CTAs’ share of global hedge fund assets, never large, became even more miniscule. It may be down to less than 2%.

In the meantime new trends were forming, fed by events in the Ukraine, in Greece, in American shale formations. During the second half of 2014 powerful downward trends emerged in the ruble, the euro, oil. So it turned out to be a great year for trend followers after some of their clients redeemed.

Funnily – or tragically, if you wish – there was a similar situation in the financial crisis. People would not invest with CTAs, whose returns tend to be very volatile. Whereupon in 2008 managed futures was one of the very few investments to make double-digit positive returns.

One disconcerting feature of CTAs is that their returns are more widely dispersed than those of other strategies. Top and bottom performers can be apart by 90 percentage points or more.

That means that different data bases, which may overlap but generally do not have the same constituent CTAs, show different results. For 2014, some databases report 6% or 7% for managed futures. Others say 8%. But the Credit Suisse Index has 18.37%, presumably because it contains a number of the year’s outperforming CTAs.

Some of the largest futures trading programs illustrate the pattern of big profits toward the end of the year. Thus Winton Capital’s diversified program gained almost 5% in November, ending the year up 14.6%. That was its best since 2008, when it made over 20%.

The 14.6% is less than the return for Credit Suisse Index managed futures, probably reflecting the fact that trend following is only part of the Winton program. All-out trend followers made higher returns.

But to put it into perspective. The Dow Jones World Index made 2.12%, S&P 500 made 13.69%, hedge funds as a whole made around 4%. The Winton program beat the S&P 500 net of fees—and those fees are substantial, though Winton promises to keep them down for a new American mutual fund with a global stock strategy.

As of the end of 2014 Winton had $26.8 billion in assets in various strategies, not limited to futures trading. Assets are down from $28 billion in 2011.

What do investors now say about withdrawing their money from CTAs? They say hindsight is 20/20. As always.


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