Well thank heavens that 2018 is over. There were ups… downs….whipsaws….phantom bonanzas that disappeared in an instant….you name it. That is as much as I would like to say about it in general….but  the point I would like to make for 2018 is …..does a year really matter in the context of my heady aspirations of wealth building while swinging in this hammock?

A terrifying sound could be heard over the parrots squawking and the martinis shaking…“Richard my love…..how did our investments do this year?”

“I will be with you in a moment honey bunny”…..Now I have to think quick. Ok…. I think I have it…..let’s talk about the long term returns and some of those good investment words like ‘patience’, fidelity’, ‘prudence’ and ‘persistance’!!! In fact why not sing a song to her?

 

On second thoughts….maybe that won’t work this time. Time for a different tack. Let’s hide the short term results within the long term performance metrics….now that neat trick always works 🙂

Ok….so 2018 overall was a difficult year for trend followers in general with perhaps January and to a lesser extent August helping to assuage the pain of the dreaded whipsaws of February and October. Apart from those exciting moments, the year can be summed up as a general churn…..however the gaps in the clouds of mean reversion and noise have been clearing over the past few months and volatility has begun to return to the markets.

In hind-site given the reemergence of volatility and trending markets we might be willing to conclude that the past decade of central bank intervention is now drawing to a close allowing for cross-asset correlations to subside and trends to reemerge as the markets now seek their own preferred equilibria.

Overall the Trend Following (TF) Index posted a loss of 5.25% for the year with the S&P 500 TR Index also suffering a bumpy ride with a loss of 4.52%. The December volatility saw a fast turn around in the S&P500TR Index with a strong rebound of 5.57% while the TF Index enjoyed a modest 0.48% increase.

Individual Fund Performance

Below are the individual performance results of the programs that comprise the TF Index ranked from highest 12 monthly performance to lowest.

Fund Program Return for Last month Return Last 12 Mths
       
Millburn Corporation Commodity Program 3.8% 23.6%
SouthWest Managed Investments, LLC Global Diversified 1.4% 14.9%
Mark J. Walsh Company Standard Program 3.4% 11.7%
Crabel Capital Management Crabel Multi-Product 0.0% 10.1%
Parizek Capital Futures Trading Program 2.9% 6.6%
Quest Partners LLC AlphaQuest Original Prog (AQO) 1.0% 5.4%
Eckhardt Trading Company Standard 1.7% 5.1%
Eckhardt Trading Company Evolution Strategies 1.2X 1.8% 4.7%
Alee Capital Management, LLC Mistral Program 1.7% 4.3%
Silicon Valley Quant Advisors UQP Small -6.4% 3.5%
Silicon Valley Quant Advisors US Quantitative Portfolio (UQP) -6.5% 2.9%
W.G. Wealth Guardian Ltd SAFI2 Program 4.8% 2.6%
Mondiale Asset Management Mondiale Trading Program (2X) -5.3% 2.0%
Millburn Corporation Diversified Program 1.4% 1.5%
Tactical Invest Management Tactical Instit Commodity Prog -0.3% 1.3%
Winton Capital Management Winton Futures Program -3.0% -0.9%
EMC Capital Advisors, LLC Classic 1.5% -1.8%
FORT LP Fort Global Diversified -3.0% -2.3%
Estlander & Partners Alpha Trend 1.1% -2.4%
Welton Investment Partners Welton Global 8.8% -3.2%
Alder Capital DAC Alder Global 10 2.6% -3.3%
Rabar Market Research Diversified Program 0.0% -3.3%
Quantica Capital AG Quantica Managed Futures 3.0% -3.6%
Mulvaney Capital Management The Mulv Global Markets Prog -6.4% -4.4%
Blackwater Capital Management Global Program -1.8% -6.0%
Campbell & Company, LP Camp MF Comp (f/k/a FME Lge) 3.1% -6.4%
Transtrend B.V. DTP – Standard Risk (EUR) -0.7% -6.4%
Rivercast Capital LLC Rivercast Program 0.0% -6.9%
Drury Capital Diversified Trend-Following Prog 0.0% -7.1%
Transtrend B.V. DTP – Enhanced Risk (USD) -1.1% -7.4%
Chesapeake Capital Diversified -3.5% -7.9%
Transtrend B.V. DTP – Enhanced Risk (EUR) -0.7% -8.6%
Alder Capital DAC Alder Global 20 5.0% -8.6%
M.S. Capital Management Global Diversified Program -0.2% -9.2%
Melissinos Trading Eupatrid Program 0.0% -9.5%
Dreiss Research Corporation Diversified Program 6.8% -9.5%
Trigon Investment Advisors, LLC Foreign Exchange Program -0.2% -10.0%
FORT LP Global Fut Prog (Glob Div Classic) -2.0% -10.4%
Beach Horizon LLP Managed Account 3.6% -10.9%
FTC Capital GmbH FTC Futures Fund Classic (EUR) 3.2% -11.4%
Rotella Capital Management Rotella Polaris Program (Divers) 0.0% -11.5%
Hamer Trading Diversified Program -3.3% -14.5%
Aspect Capital Aspect Divers Fund – Class A (USD) -0.9% -14.6%
Abraham Trading Company Diversified Program -1.0% -15.4%
Chesapeake Capital Diversified Plus -6.8% -15.5%
SMN Invest Services GmbHsmn  Diversified Futures Fund (i14) -0.9% -16.1%
Superfund Group Superfund Green Q-AG -0.2% -17.4%
SMN Invest Services GmbHsmn  Diversified Futures Fund (1996) -1.1% -17.8%
ISAM ISAM Systematic Trend Fund 0.0% -19.3%
DUNN Capital Management World Monet & Agric Prog (WMA) 4.0% -20.0%
Rivoli Fund Management Rivoli International Fund (MAP) 3.0% -20.9%
Superfund Group Superfund Green Master 0.8% -22.9%
DUNN Capital Management D’Best Futures Fund, L.P. 6.8% -28.4%

But let’s get down to it shall we without boring you with the minutae…….So does a year of an overall -5% in the TF Index really matter in the scheme of things….and furthermore given the significant dispersion of returns amongst the trend following funds for the past 12 months….what does this really mean?

If you look at the dispersion of returns over shorter timeframes such as the past 12 months, there is considerable variation between FM’s in the trend following space ranging between a loss of 28% and a profit of 24%.

There are many possible reasons for this dispersion including the different trading universes applied, the level of leverage applied, the varying methods of volatility adjusted position sizing, the different timeframes traded and the different systematic methodologies applied, however despite these differences, what is common to these FM’s is their systematic repeated application of their preferred rules. Now given these differences, this allows randomness to have a say and you must therefore factor in the dispersion in performance results simply attributed to random luck associated with the trading of liquid instruments in efficient markets.

So in a nutshell there is an implication in these results when compared to longer term performance results (where style drift is far less obvious) suggesting that the randomness associated with short term performance metrics have less bearing on the overall long term performance of these juggernauts. The variations attributed to random outcomes appear to get progressively diluted as you increase the time horizon and start seeing the Law of Large numbers start to kick in. You can see this borne out in the overall long term performance results of this broad diversified trend following method. The reason for this effect is that the occasional bonanza year dwarfs the variation attributed to the average year and significantly biases the overall result. While the average month may vary significantly, the bonanza months of the CTA’s are highly correlated and rightly so….as these maxi-yachts power ahead in the strong squalls delivered from time to time by the markets whereas the crystal ball gazers are left scratching their heads listing about in the doldrums. 

Have a look now at the dispersion of CAGR over  the long term with this same group of Funds which range between 14.4% CAGR and 0.6% CAGR.

Fund Program Return for Last month Return Last 12 Mths CAGR
         
Tactical Invest Management Tactical Instit Commodity Prog -0.3% 1.3% 14.4%
Silicon Valley Quant Advisors UQP Small -6.4% 3.5% 14.3%
Dreiss Research Corporation Diversified Program 6.8% -9.5% 13.5%
Mulvaney Capital Management The Mulv Global Markets Prog -6.4% -4.4% 12.6%
FORT LP Fort Global Diversified -3.0% -2.3% 12.0%
FORT LP Global Fut Prog (Glob Div Classic) -2.0% -10.4% 11.6%
Silicon Valley Quant Advisors US Quantitative Portfolio (UQP) -6.5% 2.9% 11.4%
Quest Partners LLC AlphaQuest Original Prog (AQO) 1.0% 5.4% 10.9%
Alee Capital Management, LLC Mistral Program 1.7% 4.3% 10.9%
Mondiale Asset Management Mondiale Trading Program (2X) -5.3% 2.0% 9.3%
ISAM ISAM Systematic Trend Fund 0.0% -19.3% 9.3%
Winton Capital Management Winton Futures Program -3.0% -0.9% 9.0%
Superfund Group Superfund Green Master 0.8% -22.9% 8.7%
Crabel Capital Management Crabel Multi-Product 0.0% 10.1% 8.5%
Transtrend B.V. DTP – Enhanced Risk (USD) -1.1% -7.4% 8.2%
Millburn Corporation Commodity Program 3.8% 23.6% 8.1%
Transtrend B.V. DTP – Enhanced Risk (EUR) -0.7% -8.6% 8.1%
Eckhardt Trading Company Evolution Strategies 1.2X 1.8% 4.7% 8.0%
Mark J. Walsh Company Standard Program 3.4% 11.7% 7.9%
DUNN Capital Management D’Best Futures Fund, L.P. 6.8% -28.4% 7.9%
Abraham Trading Company Diversified Program -1.0% -15.4% 7.7%
DUNN Capital Management World Monet & Agric Prog (WMA) 4.0% -20.0% 7.5%
W.G. Wealth Guardian Ltd SAFI2 Program 4.8% 2.6% 7.4%
Hamer Trading Diversified Program -3.3% -14.5% 7.3%
Rivercast Capital LLC Rivercast Program 0.0% -6.9% 7.0%
Beach Horizon LLP Managed Account 3.6% -10.9% 7.0%
Aspect Capital Aspect Divers Fund – Class A (USD) -0.9% -14.6% 6.8%
Quantica Capital AG Quantica Managed Futures 3.0% -3.6% 6.8%
Eckhardt Trading Company Standard 1.7% 5.1% 6.7%
SMN Invest Services GmbHsmn  Diversified Futures Fund (i14) -0.9% -16.1% 6.5%
Welton Investment Partners Welton Global 8.8% -3.2% 6.1%
Drury Capital Diversified Trend-Following Prog 0.0% -7.1% 6.1%
SouthWest Managed Investments, LLC Global Diversified 1.4% 14.9% 6.0%
Millburn Corporation Diversified Program 1.4% 1.5% 5.8%
EMC Capital Advisors, LLC Classic 1.5% -1.8% 5.8%
Estlander & Partners Alpha Trend 1.1% -2.4% 5.7%
Blackwater Capital Management Global Program -1.8% -6.0% 5.6%
Alder Capital DAC Alder Global 20 5.0% -8.6% 5.5%
Chesapeake Capital Diversified Plus -6.8% -15.5% 5.2%
Rabar Market Research Diversified Program 0.0% -3.3% 5.1%
SMN Invest Services GmbHsmn  Diversified Futures Fund (1996) -1.1% -17.8% 5.0%
Transtrend B.V. DTP – Standard Risk (EUR) -0.7% -6.4% 4.8%
Superfund Group Superfund Green Q-AG -0.2% -17.4% 4.6%
Rivoli Fund Management Rivoli International Fund (MAP) 3.0% -20.9% 4.5%
Rotella Capital Management Rotella Polaris Program (Divers) 0.0% -11.5% 4.3%
Chesapeake Capital Diversified -3.5% -7.9% 4.1%
Parizek Capital Futures Trading Program 2.9% 6.6% 4.1%
M.S. Capital Management Global Diversified Program -0.2% -9.2% 3.9%
Campbell & Company, LP Camp MF Comp (f/k/a FME Lge) 3.1% -6.4% 3.8%
Alder Capital DAC Alder Global 10 2.6% -3.3% 2.8%
Trigon Investment Advisors, LLC Foreign Exchange Program -0.2% -10.0% 2.6%
FTC Capital GmbH FTC Futures Fund Classic (EUR) 3.2% -11.4% 2.5%
Melissinos Trading Eupatrid Program 0.0% -9.5% 0.6%

So the moral of the tale is this…..”for those seeking to catch a ride on the gravy train…..you need to be able to shrug off the short term context and ordinary or subdued performance periods and be patient waiting over the long term for the extraordinary”. Be less concerned trying to cherry pick the short term performer and be more concerned in being comfortable with the long term performance metrics on offer.

Now to achieve this mindset you need to learn to ‘live with drawdowns’ as this is a continual lurker in this style of investment…but it is not something to fear….rather it is something to embrace. If it was always a smooth ride to riches then every man and his dog would be riding it. What sets this technique apart from other investment styles and why it has stood the test of time and less prone to arbitrage dilution is that it is so counter-intuitive to normal human behaviour. In this particular game, the pain of patience is rewarded. You need to leave your crystal balls and ego’s at the front door including your desire to intercede and override your system.  

 

Top 10 by by CAGR since 1 January 2000 

Below is a top ten performance table and an equal weighted performance chart of the ranked top 10 performers of our program listing in terms of annualised returns to investors (net of all fees and expenses) since 1st January 2000 or since their inception if beyond this commencement point.

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 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? You may have been under the impression that trend following was dead. Well it pays to go to the source and not the assumption, as the style drift in the trend following camp is sufficient for there to exist strong performance results within this Index grouping.



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



How is the Hypothetical “Fund of Funds Solution” Faring?

For those of you who like to tinker with Fund of Funds Solutions with a bit of leverage applied, I previously discussed a proposed approach to investing in these juggernauts without any hind sight bias to attract very attractive risk weighted returns across this diversified systematic Trend Following space.

The simple process involves analysing the track records of the Funds that reside in this TF Index and on 1st January of each year selecting the top 10 risk weighted performers at that point in time. This process is undertaken each year as you bask in the sun on your hammock swatting flies while your Fund Managers do all the hard work.

So how is this solution going as at 31 Dec 2018 and which funds will we be invested in during 2019?

This is how we allocated our investment in 2018.

Based on 2018 performance two of the 10 funds (highlighted) slipped from their top 10 standings and will be replaced by the following selection in 2019.

….and now for the performance results up to 2018.


So…back to the question from my wife…….. “How are we going my husband with our investments?”

“Well my cherry blossom you see that blue line in that chart heading towards the sky …… That is what I call our stairway to heaven…..now can I please get back to all my hard work?”

Cheers guys

Trade well and prosper

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Published by Richard Brennan

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