Trend-following strategies have not been doing well.
Winton Capital Management, “a systematic managed futures trading program that aims to benefit from the identification of market trends, either up or down, across multiple asset classes and markets”, announced July 2017 that it was cutting management fees for Winton Global Alpha Fund from 1.88 per cent to 1.78 per cent and reducing its performance fee from 20.5 per cent to 16.4 per cent.
Cliff Asness’s trend following fund, AQR Managed Futures Fund, has been posting poor returns over the last few years. Forbes reported that trend following strategies have not performed well in general referring to the Soc Gen Trend Index.
But we see two stand-out performers AHL Evolution and Systematic Alternatives Markets (SAM) which have thrived by using the same trend methods but expanding beyond traditional markets and instruments.
Here’s a look at Systematica’s flagship fund BlueTrend:
Compare that to SAM:
Both funds apparently utilize the same trend methods just that SAM trades weirder OTC stuff such as CDX Emerging Markets, Nordpool Power, Indian Rupee.
So if there is this giant pot of gold in Trend Land why is everyone else not just trading these other things?
According to Mubin Sadikot of Systematica, it’s really not that easy for other funds to copy them. Here are the 3 main challenges he says will face any traditional trend manager trying to break into the alternative trend world:
Legal and operational setup to trade OTC instruments (ISDA agreements)
Lower level of service (mainly through poor/inefficient pricing and execution) smaller funds receive from banks/counterparties on many of the OTC contracts that are not profitable for them to service (you need a large AUM in traditional quant equity market neutral/futures for them to make money)
Complexities of integrating the different skillsets (quant – trend calculation, portfolio construction, risk optimisation vs OTC – life cycle processing, counterparty management, manual trading etc.)
It seems fairly difficult for a small-size fund to face the above challenges. But what about the big multi-strats? Or the giant asset management firms? Why aren’t they setting up these niche trendy funds? Aha! There is also a capacity constraint. There is only so much Newcastle Coal you can trade. Even after increasing from 90 markets at inception to 240 presently, SAM’s capacity can only be pushed to $2bn - $2.5bn, so the fund will be closing soon.
The Evolution fund has been closed to investors.
Should investors rush to get into SAM before the gates come down, or should we start looking for managers who can trade even funkier OTC instruments? Durian futures anyone?