Outperformance in sight for those betting on trends
Quantitative funds – trend follower – are posting returns of more than 20% this year, a success that contrasts with the fall in equities. And the context will remain favorable for these strategies.
Multi-asset CTAs benefit from the volatility of assets, such as the barrel of Brent, which rose by around 80% between January and mid-March 2022. Here, the Norwegian field Johan Sverdrup in the North Sea.
Equinor
The return of volatility and directional trends is making people happy. Hedge funds have made a comeback this year, especially quantitative funds, which follow trends. Namely the trend followeralso known as CTAs (commodity trade advisors). “The environment is ideal for these strategies, because at the same time we are seeing high volatility and a clear and continuous trend: downward on the equity markets and upward on commodities, rates and the dollar”, explains Lionel Melka, head of research at Homa Capital.
Double-digit performance
“Quantitative strategies based on an approach of trend following or multi-asset CTAs actually benefit from a return to volatility across all asset classes,” confirms Mathieu Gilbert, managing partner at Goal Management. Firstly, thanks to major currency movements: the dollar against the Swiss franc, for example, gained more than 8% between April and May 2022. Secondly, the US 10-year rate rose from 1.75 to 3.15% between March and mid-May 2022 (+80%). Third, the barrel of Brent rose by around 80% between January and mid-March 2022.
So much so that, in the midst of the sharp declines in the equity market, the alternative managers who follow these trends have achieved double-digit performances since January: “Any trend that continues over time automatically benefits these strategies on the asset classes concerned”, summarizes Lionel Melka. Societe Generale’s index, which tracks the strategies of major CTA funds, the SG CTA Index, is up 26% this year, and the index that tracks hedge funds focused on the trend following (SG Trend Index) shows 35%.
“In a general way, [ces stratégies] work well in periods of euphoria or despair and much less well the rest of the time.
However, these strategies require a particular configuration of the markets. “Generally speaking, they work well in periods of euphoria or despair and much less well the rest of the time,” explains François Lhabitant, CEO and Chief Investment Officer of Kedge Capital.
For Mathieu Gilbert, the performance of these strategies could have even been even better in 2022. But they were marked by ten years of monetary policies repressing volatility and large variations, which made them less optimized for the great awakening of trends. .
Mathieu Gilbert, managing partner at Goal Management.
DR
For the rest of the year, the readability of the trends will not be so obvious, believes Mathieu Gilbert: “With an equity market which fell sharply but in corrective phases and without a real capitulation from investors, the implied volatility – embodied by the VIX index, for example – struggles to represent the decline in equity markets as an exponential rise.”
Little readability
Should we still bet on these strategies or is their effectiveness already dying out? A report, published at the end of May by a management firm, Versor Investments, estimates that the largest CTA funds use trend signals which have lost some of their appeal over the past few months. In particular, the combination of downside protection and high upside participation (called convexity) has become less efficient since last year. The report suggests that the success of these strategies in 2021 and 2022 relied more than is believed on significant exposure to the less convex components of these strategies.
François Serge Lhabitant does not make much of it, detailing: “CTA strategies have always behaved cyclically. They work well during strong uptrends or downtrends, but lose money in quiet, low-volatility markets.” Academic studies show that historically, good performance over twelve month periods is often followed by poor performance over the following twelve months, and vice versa. The Kedge expert cautions against investing by extrapolating this last observation, “because timing market by looking at history rarely succeeds.”
Sustainable trend
For him, the trend following remains attractive. “We have entered a cycle of rising interest rates, with inflation and supply issues on commodities that could last longer than expected, as well as high volatility ahead in the stock market. credit and currencies. It’s a new environment, but it should continue to generate strong trends that CTAs could take advantage of.”
Mathieu Gilbert also decides in favor of a continuation of the good performances of the CTAs. He also identifies inflation and rate hikes as success factors for these strategies, which bet on big moves in the coming months. “The return of inflation above 5% in most countries indicates that price movements are larger, but also more random. As for increases in short-term interest rates and quantitative tightening, they will encourage large variations in asset prices.
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