Trend Following CTAs: No Panacea 11 comments
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Regular readers of my blog are aware of my skepticism about the value of hedge funds as investments. While I have the greatest respect for some hedge fund managers who are capable of adding significant value, aggregate hedge fund returns have been far too correlated with S&P 500 returns and undiversifying for them to justify their fee structure. See some of my past comments here, here, here and here.
Today, it gives me no pleasure to see the hedge fund industry in disarray and about to implode. Returns are going south, redemptions are rising and the fee structure is under scrutiny. Investors didn't get the results they expected. In addition, hedge fund industry employment should not have ballooned the way it did in the boom years and now the downward adjustment is going to be painful for a lot of people, many of whom didn't make the obscene amounts of money reported in the press.
Trend following models work…
Recently I saw the news item from the WSJ indicating that trend following Commodity Trading Advisors (CTAs) exhibited positive returns for the year. No doubt some investors will allocate funds to this group of managers in search of a “safe haven”.
There is no doubt that trend following models add value. I once wrote the following about my experience working for a hedge fund that began life as a CTA:
A few years ago, I managed equity market neutral portfolios at a firm that was mainly known for commodity trading using trend following techniques, which are well described by Michael Covel in his book [Trend Following]. During my tenure there I noticed that while the commodity positions were spread out among various futures contracts they often amounted to a few macro bets (i.e. on interest rates, on the US$, etc.) I came to the conclusion that these models were identifying macroeconomic trends that are persistent and exhibit serial correlation, which creates investment opportunities for patient long-term investors. For example, if the Fed is raising rates the odds are they will continue to raise rates until they signal a neutral or easing bias, i.e. there is a trend to interest rates, which is information that investors can use. The key risk in this class of models is knowing when to exit the trend, as short and long term reversals can be devastating to the bottom line.
…but CTAs have no alpha after fees
Trend following models identify and capitalize on long-dated economic trends, which are persistent. However, academic studies show that an investor can replicate those effects in a relatively simple fashion with techniques that are in the public domain.
In other words, CTAs just don't seem to have any alpha on an after fee basis.
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This article has 11 comments:
While this might be true, an individual investor usually does not want to put in the time and effort themselves. They want a hassle free investment and that's why they invest in hedge funds.
OK this is the deepest insight into trend following I've seen in a long,long time.
"Trend following models identify and capitalize on long-dated economic trends, which are persistent."
"an investor can replicate those effects in a relatively simple fashion"
Sounds easy... just identify and capitalize !!
Hui, what exactly is your day job ?
Just take a glance at JW Henry's figure's. This guy operates the globalanalytics fund with 30% average annual vol and Sharpe ratio of 0.55. Those are downright pathetic numbers. Essentially, he's adding little to no alpha while consistently maintaining a phenomenal amount of beta. The rest of the industry is similar. Super high vol, low sharpe ratios. The one thing they add is non-correlation. Too bad there's little to no value added.
Just had a look at Henrys performance over the last year-BOMBASTIC gains-Global Analytics fund up 90%,Finance and Metal portfolio average 22% compunded gain since the 1980's,etc,etc
Most of the funds are up 40-80% ytd! ALPHA personified!
Pity the investors that removed their funds-hopefully they did'nt put em into Berkshire Hathaway(down over 40%) and suffer a drawdown that Henry has never produced in history-thats value!
Besides, this is his newest high water mark fund. See, what Henry does is practically fraudulent. He had a multi billion dollar fund at Merrill Lynch called the Strategic Allocation Fund. It had a few good years in 2001-2002 and then imploded. The thing dropped enormously during the bull market and JWH's high water mark became unattainable so he scrapped the fund and Merill redeemed their assets.
The CTA's are a joke. They're just high vol no talent a$$ clowns. I'm sure a few of them do alright, but that's nothing more than survivorship bias. None of these actually manage risk. Check any of these CTA funds. Their vol is always off the charts. Always. They're just super high beta funds. Don't be fooled.
nakedshorts.typepad.co...
sonsofsamhorn.net/inde...
And you'll notice upon further investigation that the globalanalytics fund's sharpe ratio of 0.55 is downright pathetic. considering his performance. It essentially means he's flipping coins and its only a matter of time before he has another string of bad luck like he did in 2003-2007 with his flagship fund.