Evaluating current conditions
As of late 2018 and early 2019, markets seem to have arrived at an inflection point – bouncing back and forth between old and new trends. The direction of markets over the near and long term will be informed by a combination of political and economic factors, including interest rate policy in the US and Europe, continued disharmony between nationalism and globalism, recessionary pressures, and the potential for continued divergence between the US economy and the rest of the world. In this environment, trend-following strategies can potentially mitigate risk and provide diversification by taking positions with low or negative correlations to traditional asset classes. Past periods of market decline provide evidence of this potential.
Then and now
Past performance does not guarantee future results – but it is possible to look at how trend-following strategies behaved during similar periods of market volatility when considering their ability to help mitigate portfolio risk and provide diversification.
Going into 2007, many trend-following strategies held long positions that reflected sustained developments in global markets coming out of 2005–2006. As global trends changed, these strategies adjusted their position as markets moved in new directions – shifting from primarily long positions to primarily short positions. The chart below compares the cumulative performance of the MSCI World Index2 against Managed Futures (the SG Trend Index3) from January 2007 to December 2018.
Focusing on diversification and risk management
In late 2018, as in the early months of 2007, many trend-following strategies shifted from primarily long positions to primarily short positions4 in response to changing market dynamics. Unlike passive, index-based investment approaches, managed futures have the ability to pivot their positions to pursue evolving trends. The capacity of trend-following strategies to respond to evidence of emergent market developments enables their ability to help manage risk, enhance portfolio diversification, and provide positive returns in down markets. As investors contend with an array of challenging political and economic variables in the months ahead, they may want to consider the addition of managed futures approaches in their portfolio.
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2 MSCI World Index: An unmanaged index that is designed to measure the equity market performance of developed markets. It is comprised of common stocks of companies representative of the market structure of developed market countries in North America, Europe, and the Asia/Pacific Region. The index is calculated without dividends, with net or with gross dividends reinvested, in both U.S. dollars and local currencies.
3 SG Trend Index: Equal-weighted, reconstituted and rebalanced annually. The index calculates the net daily rate of return for a pool of Commodity Trading Advisors (CTAs) selected from the larger managers that are open to new investment. AlphaSimplex Group LLC is part of this Index.
4 Long/short equity: An investment strategy generally associated with hedge funds involving the purchase of long equities that have the potential to increase in value and the selling of short equities that have the potential to decrease in value. A “long” position refers to the expectation (not guarantee) that an asset will rise in value, whereas a “short” position refers to the expectation (not guarantee) that an asset will decrease in value.
Past performance is not necessarily indicative of future results. Managed Futures strategies cane considered alternative investment strategies. Alternative investments involve unique risks that may be different from those associated with traditional investments, including illiquidity and the potential for amplified losses or gains. Investors should fully understand the risks associated with any investment prior to investing. Commodity-related investments, including derivatives, may be affected by a number of factors including commodity prices, world events, import controls, and economic conditions and therefore may involve substantial risk of loss.
The views and opinions expressed are as of 12/31/2018 and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary. All investments are subject to risk, including risk of loss
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