CTA Fund Performance Report – 29 February 2020 – “I see red…I see red….I see red”

Most of the results are now in for February from the Nilsson Hedge Database….and with a degree of intrepidation (looking at the carnage this market has wrought), it is time to report. But before I do……I thought it is best to mention the following.

This report is not to gloat as many investors are now suffering at this moment….but it offers a way forward for those that may be sick and tired of trying to predict an uncertain future.

This report stems from a class of Fund Manager that can thrive in periods of uncertainty. Not that they don’t have their periods of poor performance…..we all do…..but rather this class of Fund Manager is what I regard as an expert ‘survivor’ who avoids using any fancy state of the art modelling to capitalise on a particular market condition.

This class of FM looks at the big picture, recognises market complexity and never assumes anything about the future…apart from the principle that trends must occur in a dynamic complex system.

The common feature of this class of FM is that they all apply a very simple underlying philosophy to all their systems. They cut losses short at all times to preserve their capital, but leave the upside open-ended to allow for unlimited profit potential. So rather than predicting anything, they simply leave their systems open to the spoils that the market unpredictably presents to them from time to time.

The mantra of ‘cutting losses short and letting profits run’ is so simple in principle….but so devilishly hard to stick to over the long term due to human nature. Because the technique is so psychologically hard to stick to…it is essential that they deploy systematic processes to avoid the tendency to second guess their systems particularly during these chaotic times of uncertainty where everyone has a different opinion fuelled by their base desires of fear or greed.

Now I recognise that I am very biased by the philosophy of diversified systematic trend following….but as a wealth building exercise over the long term…..there are very few techniques that can match it. You can either choose to think that you are smarter than these guys, or you can be humble and learn from them. Before you start trying to outsmart them, take a long hard look at their validated track records. This is not hearsay or idle trader gossip….this is real verifiable ‘fact’. Due diligence is such an essential pre-requisite when you are talking about your financial future.

As we are all aware…….things started turning ugly in late February where dark clouds were brewing from the COVID 19 virus reaching pandemic proportions. This, combined with the Saudi/Russia failed negotiations over oil with the Saudi’s reverting to a stance of peak production,…sparked the end of a decade long regime post GFC of rising asset values. This meteoric and sustained rise in large part can be attributed to the easy money and debt fuelled binge accompanying market intervention practices.

Now as most trend followers are fully aware….since the GFC all asset classes have started to become more and more highly correlated. No sector was spared from this influx of available easy money as the Central Banks kicked the can down the road. The gorged financial system just needed a butterfly flap (in this case a virus) to demonstrate the underlying fragility of it all.

Accompanying this rise in correlations was also the tell tale sign that market intervention was suppressing natural market volatility over this period….”Let’s lever up that low vol and bring on the short vol strategies…what could possibly go wrong?”

As a result of the predictable oscillations surrounding a market bound by intervention practices….every man….and their dog…wanted to participate in this predictability….but failed to see the risk that was warehousing in the system. The rhythmic cry of ‘buy the dips and sell the tips’ could be heard through the investment community. “If you get it wrong, no probs…the government will bail you out”

Of course for those that had their eye on building risk such as the diversified systematic CTAs…they just had to suck up the building drawdowns over this period as their refusal to predict forced them to ‘stick to their systems’…….but as they say….nothing lasts forever and it appears that trend following is no longer ‘dead’.

Now do not expect the Trend Followers to reap the bounty  during February. The ‘proverbial’ hit the fan in late February. Most trend followers were turning their ships around in late February as prior favourable trends of a decade long regime were coming to the end……but do expect big things in next months (March report).

Below is a chart of 4  markets  that demonstrate the trading conditions of February (within the yellow outlined regions). Take note of the overall trending conditions prior to February and the common direction of trending environments post February 2020. As mentioned before……..that rise in overall correlations between asset classes between 2010 and 2020 is now being felt full force today with their unwinding. Nearly all asset classes are turning south. You can now see where risk was lurking in the system as a risk event is clearly demonstrating where it was hiding. In a nutshell…everywhere. I see red…I see red…I see red.

Now dependent on the universe you are trading and the timeframes you specialise in…your trend following fortunes during commencing periods of market transition will be dispersed. That just comes with the trend following territory. You can clearly understand this when you examine which markets are trending and the nature of those trends. …….but as a general principle if trends persist….then returns within this style of FM start to become far more correlated and less dispersed. During tough regimes, returns disperse amongst the trend following community but during favourable regimes where outliers pop their heads up and cascade across asset classes…we all tend to get fed.

It appears that we are on track to receiving some amazing returns going forward…..the shorter term guys and the longer term guys….provided they are heavily diversified. Furthermore, as the dominoes fall associated with the relationship between correlated markets, then provided you are in the right direction….your fortunes are made. Of course for those on the wrong side….they always cut losses short to avoid the pain of being positively correlated when it actually hurts.

Have a look again at the charts above and then consider what March is likely to bring to this style of trading philosophy if these trends persist. No predictions….no fear…….just applying that same old boring repetitive principle day in and day out of cutting losses short and letting profits run. Can you see the simplicity and wisdom in this approach yet?

Anyway….now to the report for February 2020.

We use NilssonHedge for reporting purposes which allows us to expand our performance coverage to include a broader array of long term established FM’s who occupy the CTA space and have been in operation since 1 January 2000 to the current day. This performance report focuses only on those funds with a long term track record (approx 20 years). The reason we adopt this long term horizon for reporting purposes is that to survive in these financial markets over such a long timeframe and still be alive today offering absolute returns to the client takes a special breed of Fund Manager who has expertise in surviving the turmoil of a variety of different market regimes. We like these guys and that is why we focus on them. As the years roll on we will progressively expand our coverage to include those FM’s who narrowly miss out in their inclusion when they reach the 20 year performance track record horizon.

So far for the month of February 2020 we have 50 CTA’s reporting and within that grand total we have 33 Systematic Global Trend Following funds. We have to draw the line somewhere and the slow coaches unfortunately miss out.

For those that like the detail, below are the index constituent performance results for the CTA Composite Index (50) and the TF Global Index (33).

The CTA Composite Index 50 was marginally down -0.80% for the month ….and the TF Global Index 33 was also marginally down -0.72% .

Systematic Trend Following Global Index Overview

Now as ardent trend followers ourselves, we like to narrow our focus to the Systematic Diversified Global Trend Following community of CTA’s.

For an overview of what moved and what didn’t for the month in this investment space then you should go straight to the source and listen to the Fund Managers themselves.  In this regard, there is no better resource than that provided by Niels Kaastrup-Larsen of ‘Top Traders Unplugged’ and (Dunn Capital Management) in his Systematic Investor Series with Moritz Seibert and Jerry Parker and in Niels’ Market Barometer blog series.

Top 10 by CAGR since 1 January 2000

Below is a performance table and an equal weighted performance chart of the top 10 performers of the Long Term Trend Following Index Composite in terms of annualised returns to investors (net of all fees and expenses) since 1st January 2000.

Here is a scatter plot that highlights where the top 10 sit in terms of their Compound Annual Growth rate (CAGR) and Maximum Drawdown over the performance monitoring period.

Below are the performance metrics of the Top 3 from this Top 10 list by CAGR.

Top 10 by Risk Adjusted Return (using the MAR ratio) since 1 January 2000

Now onto the risk adjusted return category. This category is for those that get ulcers when riding the drawdowns of leveraged volatile equity curves. Here are the results of the Top 10 in this category.

….and the top 3 from this Top 10 category.

Top 10 for the last 12 months

So how are the guys going in the short term? There is enough style drift in this camp to observe significant variation in performance returns over the short term. Some of the mob have performed strongly over the last 12 months.

….and the top 3 from this Top 10 category.

Well that’s a wrap for the month… During these unsettling times stay safe, bet small and simply cut your losses short and let your profits run. We have no idea how or when the dust is going to settle. All we do is follow price using robust trend following systems that have been rigorously tested across as wide a range of different market conditions as we can muster. While history never repeats and there is never any guarantees in an uncertain future we can be at least confident that we can survive and protect our hard won capital.

For those that are entering bonanza territory….a big congratulations. Your  patience and perseverance is paying off .

Now I have this song going round and round in my head………

Trade well and prosper

The ATS mob

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