The trend is your friend… until the end. August was a great green month for many hedge funds (with Multi-Strategy and Event-Driven strategies doing best). But, as RBC notes., ‘trend-following’ CTA/Managed Money funds “got smoked.”
Spot the odd strategy out…
Commodity trading advisers, the catch-all phrase for a breed of quantitative investors who use trends in asset prices and volatility as trading signals, posted some of the hedge fund industry’s worst losses in August — and it isn’t getting better. The group is down between 1 percent to 1.5 percent this month, according to Credit Suisse Group AG.
Wrong-way bets on everything from Treasury rates to commodities have cost trend followers as market correlation whipped up before this week’s meeting of the Federal Reserve. In particular, CTAs paid a price for betting interest rates would fall in the second half of the year, Credit Suisse said.
“The trend-following CTAs have given back the vast majority of a profitable first half of 2016 as their long equities, long rates and short crude gambit results in losses,” wrote Mark Connors, Credit Suisse’s global head of risk advisory in New York, in a note to clients Tuesday.
It’s a reversal of fortune for the group, which by Credit Suisse’s estimate had been one of the best hedge-fund categories in the nine months through June, rising 5.4 percent. As RBC explains,
STRATEGY PERFORMANCE UPDATE SEES SYSTEMATIC / CTA / TREND-FOLLOWING SMOKED QTD (2nd column from right) FOLLOWING THE VaR SHOCK: That said, those with shorter-term models have likely profited from the pivot back into the old ‘long fixed income / long equities / long crude / long gold / short volatility regime seen over the past few sessions, so expect these strategies turn again turn higher imminently as leverage is re-deployed.
Given the force and speed at which they ditched equities, it’s likely CTAs contributed to the recent bout of volatility, said Credit Suisse’s Connors, particularly since equity long-short funds increased stock holdings to near-peak levels. During the stretch, the VIX spiked 40 percent in one day and the S&P 500 Index had its worst daily loss since the British vote to leave the European Union. The stage was set for a rough patch starting in June, when crude’s decline caused the trend-following managers to bet against the commodity. While that bet worked as oil dropped 14 percent in July, it burned shorts the following month when crude snapped back 7.5 percent.
“When trends switch, they have a short-term model and can pick up on that, and they caught the move in oil in June,” said Connors by phone. “The frequency of shifts in oil are hard to trade.”