Delegates at GAIM conference
Conference took place in Monaco from 22 to 24 June
Monaco - Last year at GAIM, the managed futures discussion was a bit different as funds suffered from a heavy drawdown period. Fast forward to today, and there's been a big recovery after a strong years' performance.
This performance swing brings up questions over the cyclical nature of managed futures strategies. Matthew Sargaison, chief investment officer at AHL, a diversified quantitative investment manager based in London, pointed out that there was a significant shift in the behaviour of markets driven by the financial crisis and its fallout, as well as reactive central bank actions.
But just look outside the G7 developed economies and it's a different story. AHL's Evolution fund - which trades interest rate swaps and credit markets mostly in emerging markets - did not have a flat period, Sargaison noted.
From L to R: Paul Mulvaney, Mulvaney Capital; Chad Martinson, Efficient Capital; Peter Kambolin, Systematic Alpha Management; Marco Fasoli, QuantBridge; Matthew Sargaison, AHL; Tony Gannon, Abbey Capital
"It was only really in the middle of 2013, 2014 that markets stopped behaving in this classic 'risk-on-risk-off' behaviour that we saw (after 2008) and since then the environment has returned somewhat back to normal," he said. "That doesn't strike me as a cyclical behaviour. That seems like (an) exogenous event-driven behaviour."
Paul Mulvaney, CEO and CIO of Mulvaney Capital, pointed out that the "big money" in trend following chases relatively few sectors - interest rate, currency, some stock indices, and the largest commodities. As such, it is possible that trend following is more closely linked to a business cycle.
That's where diversification comes in however.
"Trading a really diversified basket of futures, the trends come along randomly and I don't see any reason for that to be cyclical in nature," Mulvaney said.
Marco Fasoli, co-founder of QuantBridge, said that the cyclicality of traditional trend following shows up in terms of performance - tending to outperform in trending markets but challenged when markets are choppy.
QuantBridge uses adaptive strategies and machine learning for short-term trading, with the objective of providing a smoother return profile. Over the last 15 months, and only until very recently, Fasoli has seen the systems' holding periods lengthen significantly - from a few days to a few weeks or even months.
What that means is that QuantBridge's adaptive systems started behaving more like trend followers, Fasoli explained.
Marco Fasoli, QuantBridge (Right)
"The traditional way of allocating capital to different portfolio assets, in this case CTAs, is fundamentally flawed."
"If you look at the rolling correlation against CTAs - we were highly correlated over the last 12 months, but effectively uncorrelated in the prior period. And that is exactly what we would expect to have in systems that are adaptive," Fasoli said.
Chad Martinson, director of Investments at Efficient Capital, an allocator, said that in the beginning of 2015, managed futures saw the largest inflows since prior to the global financial crisis after being the bottom choice for institutional investors at the end of 2013, right before the strategy took off.
"You have an asset class that hits a home run when the world's falling apart, and then grinds sideways when your stock portfolio is doubling every year. It sounds like a pretty good trade to me, but you can't time it, your exposure needs to be long term and strategic," Martinson said.
Peter Kambolin, CEO of Systematic Alpha Management, said that investors seemed to have not learned the lessons of the last drawdown, as inflows have been going to long-term CTAs.
"It makes more sense to allocate to diversified strategies, not diversified firms," Kambolin said. "You might have five CTAs and their correlation to one another is 65%, then what is the point of buying all five?"
Fasoli argued that allocations should aim at minimising risks of expected portfolio drawdown.
"The traditional way of allocating capital to different portfolio assets, in this case CTAs, is fundamentally flawed," he said. "The answer should be whatever minimises your risk of expected portfolio drawdown, and that actually changes over time."