Trend followers and quant macro managers thrive; and fear outweighs greed in the credit options markets.
Trend followers and quant macro managers thrive; and fear outweighs greed in the credit options markets.
June 28 2022
Diving, Thriving and Surviving: Hedge Fund Performance in 2022
What types of fund managers are doing well in 2022? Not index managers, for a start: the S&P 500 index has been down in 10 out of the past 11 weeks, and is down by 17.9% year to date. Indeed, in 5 of the 7 trading days between 9 and 17 June, at least 9 out of 10 stocks in the S&P 500 were down. Only 11 of the stocks in the index are up year to date, none by more than 5%, and 38 stocks are down by 20% or more.
Is anyone thriving in such a negative environment?
Figure 1 shows that the major winners this year have been trend followers such as CTAs and quant macro managers. As we might expect, long-only equity strategies have clustered together with negative returns. Their long-short counterparts are a mixed bag, with a spread of positive and negative returns so far this year.
Figure 2 gives us an inkling as to why this should be, showing the year-to-date returns of different types of active manager on the x axis, plotted against their annualised volatility on the y axis. We can see that many of the trend strategies run very high levels of volatility compared to their discretionary counterparts. This is unsurprising, as volatility is required to have trends in asset prices, but it does underline the extent to which quant trend strategies can provide excellent downside protection during market selloffs. The message from performance is clear – when markets fall and volatility rises, trend followers tend to cope very well indeed.
Figure 1. 2022 Hedge Fund Performance
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Source: SG Nelson Report; as of 21 June 2022.
Figure 2. Fund Performance Versus Annualised Volatility
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Source: SG Nelson Report; as of 21 June 2022.
Credit Gets Skewed
One of the aspects of markets in 2022 has been the lack of diversification offered by different asset classes. Both stocks and bonds have sold off together: the S&P 500 index is down by some 17.9% while at the same time global high-yield corporate bonds are down by 15%. This presents a challenge to multi-asset managers. But as equity markets grind lower while monetary policy tightens, what do investors make of the prospects for bonds?
Figure 3 uses option pricing to assess investor sentiment. The orange line shows the cost of a 10% out-of-the-money put on a high-yield corporate bond ETF, and the blue a 10% out-of-the-money call, with the shaded area showing the skew (how much more a put costs than a call). The skew in credit markets is now very asymmetric: investors are much more willing to pay for the downside protection offered by puts than they are to pay for upside exposure via calls. In short, few expect the pain in bonds to end any time soon.
Figure 3. High Yield Bond Option Skew – Puts Versus Calls
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Source: Bloomberg; as of 21 June 2022.
With contributions from: Jonathan Daffron (Man FRM – Deputy Head of Investment Risk)
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