Well, it’s been a crap month for the trend followers.
That should come as no surprise.
Normally I try to paraphrase myself rather than quoting directly from previous posts, but frankly, that gets tiresome by the end of the week, so I’m going to save us all some time and just excerpt a couple of passages from “The Usual Suspects And A Theory On Global Macro Funds” published here on October 16:
CTAs took a lot of the blame for [the October 10/11 selloff]. If risk parity is the scary bogeyman that nobody wants to implicate for fear of being publicly castigated by the likes of Ray Dalio, the trend followers are the red-headed stepchildren of the quant community. We all feel free to beat them mercilessly when nobody else will fess up. On that score, it looks to me like the SG CTA index just had one of its four worst 5-day runs since the financial crisis:
Fast forward to this week and it looks like the SG Trend subindex is having one of its worst months since the crisis.
There’s no mystery here. Wild swings, outsized moves and a combination of stocks and bonds selling off in unison has thrown these things for a loop. If you want to know what’s likely causing the problems, you can just consult the following two excerpts from a June 27 note from SocGen (I’ve been saving these two short paragraphs for months – I knew they’d probably come in handy):
With the volatility bout in February, global markets appear to have ushered in a new regime of high volatility coupled with a lack of enduring directional trends. Markets are pulled by the promises of late stage economic growth boosted by monetary and fiscal stimulus. They are also contending against the risks of rising geopolitical tensions and the likelihood of potential recession. So they end up moving up and down with no clear direction.
Such sideways markets are challenging for convex strategies such as trend following systems. With their convex profile, trend-following systems offer strong positive returns in long lasting bear markets while participating positively to the upside in extremely bullish regimes. However trend-following systems tend to struggle in a directionless environment. They also may fail if markets fall or rise abruptly. February this year is a case in point.
Yes, “February this year is a case in point” and now, so is October.
You can (and probably should) read more about this via a good piece out Friday from Bloomberg called “Trend Followers Stung in Hedge Fund ‘Bloodbath’ as Rout Deepens“, but suffice to say this is the bottom line (from one Vaqar Zuberi at Mirabaud Asset Management):
There’s only one exit and everyone is trying to exit now because the models are telling them to do so.
The nice robot will tell you to get out of the crowded theatre, but “he/she” can’t make the exit any wider.