Hedge fund strategies that rely on complex algorithms and machine learning technology to structure trades have outperformed the stock market this year.
Trend-following hedge funds (also known as commodity trading advisors or managed futures strategies) are computer-based funds that use quantitative programs, statistical models, and price signals to process vast amounts of data and invest across the futures market.
They aim to identify and trade large and consistent trends (both upward and downward) across stocks, bonds, commodities, and currencies, and profit from that continued momentum.
Société Générale’s SG CTA index, the sector’s main performance benchmark that tracks the daily net returns of leading strategies including Man Group, PIMCO, AQR and Winton Capital Fund, posted a 15.7% return in the nine months to the end of the third quarter. By comparison, a broad-based S&P500 It rose 11.7% over the same nine-month period.
“Fast, contrarian, and right.”
Industry experts told CNBC how CTA correctly judged September’s sudden bond selloff by shorting U.S. Treasuries. This added to previous gains from a bullish position in the dollar and a long bet on oil before the Iran war.
“CTAs have dominated the rest of the hedge fund world this year,” said Andrew Beer, managing member of Dynamic Beta Investments. He said the sector was “early, contrarian, and right” when it began buying oil in January, before the Iran war, before successfully positioning itself for rate hikes in the face of global bond market turmoil.
Simple Managed Futures ETF.
“They nailed two major themes in the market: AI-driven optimism for stocks on the one hand, and panic over oil prices and inflation on the other,” Beer told CNBC via email. “Humans are too emotional to time the market. Machines are much better at it.”
Nicolas Gaussel, CEO and CIO of Metri Capital Management, said CTA has effectively weathered inflationary tensions thanks to its ability to take short positions in bonds. He added that the inverse correlation between stocks and oil was another key feature that helped boost this year’s results.
Brent crude oil.
Gaussel said this year was shaped by two important structural themes. There is a strong positive correlation between stocks and bonds, and a strong negative correlation between energy and both stocks and bonds. This has proven to be a challenging environment for traditional “60/40” portfolios.
“The positive correlation between stocks and bonds has been particularly difficult for traditional long-only diversified portfolios. Bonds have underperformed, and bonds provide poor diversification relative to stocks. In contrast, CTA’s ability to short bonds and short-term rates has proven to be highly beneficial,” Gaussel added.
“This is a reminder that one of CTA’s key strengths is that it does not rely on bonds to play a traditional defensive role.”
Looking ahead, the performance of trend-following funds toward the end of the year will likely depend on energy prices and interest rates, said Yong-Shin Kun, chief investment officer at Mast Investments.
“If September is any indication, we are at a stage where the ties between our countries are beginning to spill over meaningfully into our currency and stock markets,” he told CNBC in an email.
“As a result, while CTAs are generally well-positioned to buffer traditional portfolios, the risks in many CTA books are becoming increasingly concentrated.”
