2015 is unlikely to be another 2009

In this CTA Intelligence article, Sandy Rattray and Graham Robertson discuss why this year is different and not time to take profits.

Download

The year 2008 has always been viewed as the banner year for CTAs. Given the sizeable equity market falls1, the Newedge Trend Index’s return of 21% certainly raised the profile of the trading style on an investor’s radar.

Here was a strategy that delivered long-term returns with low correlation to other asset classes, and gave protection to traditional portfolios in times of crisis.

But was 2008 really a banner year in terms of the environment for trend-following? To answer that question, it is perhaps worth stepping back a little. Trend-followers require trends in individual instruments in order to be profitable. They trade multiple instruments across many asset classes in the hope of capturing trends in other places when trends in one place are hard to find.

Thus the ideal environment for trend-followers is one with trends at the instrument level, and low correlation across instruments, such that trends can be found in many different places.

In this context, however, 2008 was far from ideal. Sure, there were strong trends in equities, fixed income, gold, oil etc., but they were all caused by the same thing, namely the credit crisis.

Correlation was high. Individual instruments were trending, but diversification was not there. Without diversification, portfolios were vulnerable to reversals. It could be argued that this was the reason for 2009’s poor CTA performance; the Newedge Trend Index lost 5%.

With the index up 20% in 2014, the question is inevitably asked, “will 2015 be another 2009?” Our answer is that there are few signs of similarity.

The environment is very different now. We have written on numerous occasions for CTA Intelligence about the fall in correlations post-2013; current levels are close to those that prevailed pre-credit crisis. In addition, single-market Sharpe ratios are also picking up significantly (see chart below).

This tells us that trends are appearing at the instrument level; a fairly intuitive observation given what is happening in markets, with strong trends in US stocks, European bonds, the US Dollar, Yen, and oil, for example.

Thus it would seem that both of the key ingredients for performance are in place. We think 2015 is unlikely to be another 2009 and, we believe, now is not the time to take profits.

2015 is unlikely to be another 2009

Source: Man database.

1. The MSCI World Net Total Return Index hedged to USD wasdown 38.4% in 2008.

Download Full Article

Important information

Opinions expressed are those of the author and may not be shared by all personnel of Man Group plc (‘Man’). These opinions are subject to change without notice, are for information purposes only and do not constitute an offer or invitation to make an investment in any financial instrument or in any product to which the Company and/or its affiliates provides investment advisory or any other financial services. Any organisations, financial instrument or products described in this material are mentioned for reference purposes only which should not be considered a recommendation for their purchase or sale. Neither the Company nor the authors shall be liable to any person for any action taken on the basis of the information provided. Some statements contained in this material concerning goals, strategies, outlook or other non-historical matters may be forward-looking statements and are based on current indicators and expectations. These forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update or revise any forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements. The Company and/or its affiliates may or may not have a position in any financial instrument mentioned and may or may not be actively trading in any such securities. This material is proprietary information of the Company and its affiliates and may not be reproduced or otherwise disseminated in whole or in part without prior written consent from the Company. The Company believes the content to be accurate. However accuracy is not warranted or guaranteed. The Company does not assume any liability in the case of incorrectly reported or incomplete information. Unless stated otherwise all information is provided by the Company. Past performance is not indicative of future results.

CH/15/0455-P

Please update your browser

Unfortunately we no longer support Internet Explorer 8, 7 and older for security reasons.

Please update your browser to a later version and try to access our site again.

Many thanks.