CTA Fund Performance Report – 30 November 2020 -The Elusive Sliver of an Edge in an Otherwise Efficient Market
What is lurking in the minds of many traders is the notion of whether markets are efficient or not. Now to be a trader as opposed to a gambler, a central premise resting in your philosophy is the principle that an edge can only be found in a market with inefficiencies. If the distribution of returns made available to a trader falls within the description of a normal (Gaussian) distribution, then the game is over in the long term. Lady luck may allow you to survive for an extended period, but the Law of Large Numbers will get you in the end.
So as a speculative trader we hold onto the notion that while the market may be very efficient at times, there may also be times when the markets are inefficient. The degree of inefficiency leads to opportunities for the trader which account for their edge.
What many long term traders have suspected over time is that markets are actually quite efficient and becoming ever more so. That is the whole point to a market. To create an efficient marketplace where buyers and sellers can transact at ‘fair value’. Inefficient markets are like barter economies or new market opportunities such as crypto-currencies, new issues, new indices etc. where initial inefficiencies are slowly whittled away by more and more participants interacting.
What this means particularly for well established liquid currency markets are that non-efficient moments when ‘real’ opportunities can be taken by traders as opposed to random luck or ability to exploit a single market condition are fleeting in nature and seldom long lasting.
You find that this ultimately impacts the length of time that you can survive in this market as the element of effective randomness of outcomes takes a long time to play out when non-leveraged….but a quick time to play out when leveraged.
Unless you can find an enduring edge in this market with a particular technique that prospers when inefficiencies occur yet can still survive over an extended array of different market conditions that are unfavourable (eg. diversified systematic trend/momo ) this therefore forces you into the alternate world of convergent methodology whereby you pin your hopes on the longevity of a narrow range of favorable market conditions. Such convergent methods lead to inevitable ‘strategy hopping’ in search of the elusive ‘ephemeral edge’. The long term success of convergent strategies is not attributed to your ability to ‘make hay while the sun shines’, but rather your ability to not lose your capital when conditions turn unfavourable.
As markets become more efficient, your ability to find an actual edge in the game decreases. You may be fooled into thinking that you have an edge in a particular ‘fairly stable’ market condition, but as soon as a disruption occurs in those conditions and a new market condition is generated…you realise quickly that your solution no longer works. You therefore did not have an actual edge in the first place.
Accepting that the market is efficient most of the time does two things to your trading psychology. It forces you away from even caring about a single trade to one of simply caring about the next few thousand trades and ensures for your long term survival that you must seriously reduce your return expectations, leverage appetite and focus on risk management.
These fleeting inefficient times means that you need to be in the game to participate in them….but to be in this position you must be a survivor. The only real way to achieve this is to protect your capital base at all times the market is efficient so that you are available when the unpredictable non-efficient anomaly comes your way.
Now to the monthly CTA Fund Performance Report for November 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 November 2020 we have 53 CTA’s reporting and within that grand total we have 35 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 (53) and the TF Global Index (35).
The CTA Composite Index 53 was up for the month by 2.21% with the calendar year YTD offering modest growth of 6.28%….and the TF Global Index 34 was also up 2.22% with a YTD calendar contribution of a mild 2.69%.
Now as ardent trend followers ourselves, we like to narrow our focus to the Systematic Diversified Global Trend Following community of CTA’s.
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. Just look at those returns. It might be a bumpy journey along the way….but when these guys nail it…they hit it out of the ball-park.
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 3 Equal Weighted Combination Portfolio – The Blend of Blends
Now as great as the individual risk adjusted returns of the Top 10 in the prior category are….we can do better when we look at the performance of possible combinations from the TF list. We iterate across the TF Index to find the Top 3 in terms of Risk Adjusted returns as a combination portfolio each month. So for those avid readers looking for the best risk-adjusted result of a possible equal weighted threesome….here is the result for the month.
Just look at those risk adjusted metrics. With a bit of leverage we can reach for the stars with this combination.
The 3 contributing funds for this month based on an equal weighted blend are as follows:
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…
We wish all readers and members of ATS a wonderful Christmas and a Happy New Year. It has been a wicked year for 2020….but we are crossing our fingers for 2021 where all the hard work of trend following just may pay off.
Trade well and prosper
The ATS mob