How is your trend-following managed futures strategy able to do so well in this type of environment?
“Crisis Alpha Opportunities” are opportunities gained during periods of market stress or crisis. Strategies like trend following managed futures are specifically designed to constantly measure where markets are going and how things are changing across a wide range of methodologies. What we find is that we move as the markets move. So, as markets move in different directions, we’re constantly adjusting and following where markets go. So in the moments when there’s a lot of uncertainty, or there’s a lot of stress in the markets, it turns out that people tend to be much more polarized in their actions, either for behavioral reasons, or for the fact that they may be driven into action based on risk management and other typical institutional protocols.
So the key thing that we are following, and what’s different about us, is that we’re much more technical in nature. We’re actually looking at where are the markets going, as opposed to why it’s going somewhere, and that means that we’re listening to the markets, and seeing where they are pointing. So if I think about what happened earlier this year, especially January, what was very ominous to me and was giving a little pause, was just how our trend-following signals started to see a growing apprehension not in the equity markets, but more so in the other periphery markets, which were starting to price in some of the uncertainty and some of the potential impacts of a potential pandemic.
You mentioned back in early March that the market smelled a skunk. What does it smell now?
Our signals have gone from being very cautiously optimistic about equities to cautiously pessimistic. Right now, if I take a look at how trend signals are looking, there’s definitely a very cautious view on equities, cautious and slightly negative.
When you say that the stance currently, at least for equities, is “cautiously pessimistic,” can you maybe walk us through the evolution of the strategy?
I’ll start with, at the beginning of the year. It was quite interesting because after a year that was so phenomenally good for the equity markets last year, things were looking good, bond markets had been more range-bound and reverted somewhat in December. So it was really looking like a very pro-equity market environment. I know growth estimates were a little bit more muted than the prior year, but in general, the risk-on theme had grown a lot and we’d seen that in EM currencies; we’d seen that in equities.
But then around mid-month in January, as people started to notice some of the things that were going on in Asia, we noticed that our potential signals in fixed income started actually to tick up. Our short view on energies started to grow. Then as we had sort of an initial hiccup at the end of January, we started to pick up some potential concern, not in US equity markets, but in some of the cross-asset markets. What was interesting is that you started to get to a position which looked very hedged, so it was long equities, long fixed income, short energy. Now, if you think about that, that’s really a hedged position; it’s almost like a no-position, in the sense that you’re kind of – if equities go down, you have things that might go up in terms of your positioning. So that continued in through the month of February.
February 19 was the peak before the great fall. What’s been interesting about that is that all of the other signals that we were seeing in other asset classes just extended during these periods of time, so the short energy trade grew strength. We also saw fixed income positively responding to that. So for us, it was really about a somewhat hedged position, so trend following in average was roughly flat for the month of February, which I think is relatively spectacular given the type of moves that we saw.
Then in March, as we were seeing this move continue, we were getting out of equity markets, and trend following signals were reducing exposure to equities down to an almost neutral to very low position, and we saw continued gains in fixed income, as well as commodity markets.
Could you explain some of the signals that define a trend in your strategies?
Overall, I tend to explain a trend-following system as similar to a voting system. You have many different models with different time horizons in terms of how much data they’re using. They all come together in aggregate to vote on where the market is going. What we’re really trying to do is take in all this data from the markets, which as you know can look very different when you look at a week, a month, and a year. We try to use mathematical techniques to measure those, and then aggregate them together, letting those approaches vote to create an overall signal. What this means is that in aggregate, we are trying to measure all the information and bring it together to give ourselves an overall view of where the market’s going, because trend following is really just momentum trading across different assets. You’re following where things are moving, and you’re adjusting as the world changes.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.