Trend-following CTAs failing badly. 3.7% returns for past 10 years.

Discussion in 'Professional Trading' started by learner88, Mar 1, 2019.

  1. The most damning evidence is the 3.7% returns for past 10 years. The annualised interest is close to bank deposits. Risk-adjusted, the performance of CTAs is so dismal that they should bury their heads in the sands. Who would want to invest in high-risk, low-gain CTAs.

    Hedge fund investors learned that the hard way last year when data-crunching computers that invest $220 billion based on historical price trends did worse than most other managers, robot or human. The losses were so bad that investors pulled billions of dollars out of an investment strategy that for years had, paradoxically, been regarded as a great way to protect portfolios from downside risks.

    Turns out the algorithms behind so-called trend-following quants are rather primitive and suffer from many of the same weaknesses a mortal brain might. They've struggled to react fast enough to the unforeseen side effects of ending a decade of central bank stimulus, and even seem to get baffled by U.S. President Donald Trump.

    Robotic traders now manage about $1 out of every $3 held in the world’s $3 trillion hedge fund industry, including models that use inputs like company’s profitability, trends in volatility or shifts in economic cycles to make trading decisions.

    But trend followers keep it simple, identifying when to enter and exit trades by back testing price trends against decades of data.
    Problem is, they aren’t very good at responding to surprises—and there have been plenty when central banks removing support from markets can trigger abrupt spikes in volatility or a 280-character tweet from Donald Trump can exacerbate tensions with China. Ultimately, the speed of markets these days can easily confound the historical price trends at the heart of the approach.

    “It’s a strategy which in its pure terms is really probably obsolete,” said Robert Frey, whose been working in quantitative investing since it was still in its nascent stages of development in the early 1990s.

    Frey, who has a doctorate in applied mathematics and statistics, previously worked with Jim Simons at Renaissance Technologies LLC as it grew into the world’s biggest quant-focused hedge fund, now with about $58 billion in assets. He started his own company, FQS Capital Partners, in New York in 2009 to invest in quants, and has gradually moved away from trend followers.

    The strategy hasn’t really delivered. Between 2008 and 2018, Societe Generale’s main trend-following index made only 3.7 percent, compared with an average gain of 62 percent for hedge funds and a more than tripling in the S&P 500, including dividends.

    It was the crash of early February 2018 that really exposed the limitations of CTAs. It happened unexpectedly after a rally in January, only for markets to bounce back days later. Unlike high-frequency traders that can get in and out of trades in milliseconds, CTAs are typically programmed to change holdings slowly, over several days or even months.

    By the time they’d adjusted for the falling trend, CTAs were getting burned on the way up. Their net asset value slumped 9 percent in February, the worst drop in 15 years, and took another 4 percent beating during the abrupt market U-Turn in October.
    dealmaker and Nobert like this.
  2. tommcginnis


    Usually when we hear, "Size matters!" -- what is conveyed is an admiration and a recognition that size confers an ability to weather swings, to buy out of risk, to avoid the tumbling and trampling that smaller entities face.

    But here, size means slower. Size implies maladroit. Size itself denies the ship the ability to dance on the waves, even while it gives plows sturdily into them.....
    murray t turtle likes this.
  3. smallfil


    Computer algorithms only follow the rules you set before you wrote the code. Garbage in, garbage out! And hedge fund managers are a dime a dozen. There are only a few good hedge fund managers who actually, know how to trade the stockmarket. Timothy Sykes was a hedge fund manager who lost a good chunk of his monies and that of his huge investor. Seems to me some of them are academics who do not actually, know how to trade the stockmarket. A lot of academics do their studies and research and supposedly, know how to beat the market? How the hell can you be good making monies in the stockmarket when you do not even trade the stockmarket?
    murray t turtle likes this.
  4. Quiet1


    It's not the speed of the market that undermined trend following it's the lack of economic volatility since the GFC. Historically very big drivers of trend following performance have been interest rates and currencies. If you believe economic volatility will return, bet on trend followers, if you don't, don't.

    Arguing that academics can't trade is a very 1970s, 1980s or 1990s way of looking at the world. "Academics" absolutely dominate the current markets in every way.
  5. smallfil


    You mean the ones who fail or put up mediocre performances?
    murray t turtle likes this.
  6. MattZ

    MattZ Sponsor

    Quite often I look at CTAs with long term track records and their performance. Quite often I am puzzled as to the level of assets under management (AUM) and the track record. Just puzzled. I see CTAs with good track records and very low AUM. I am not talking about guys with 2-3 years, but 5,10 and 15-year-old track records, etc. The only explanation I can find is that some CTAs may come from institutional backgrounds and are funded because of connections, but then do not perform well. I am also sure that those who do well in the long haul, also face withdrawal of people who are scared when drawdowns occur.

    There are good CTAs out there, but it takes an enormous effort to find them and ask the right questions. I like working with CTAs and help customers who look for diversification, but it is a challenge to find someone who knows how to scale, have an organized back office and are capable of recovering from rough periods.
    shatteredx likes this.
  7. %%
    Typical professor; not a possessor.
    At least Mr T Sykes had some huge up years;
    and puts his book for a free download.I'm enjoying his book, not that i want to trade penny stocks.:cool::cool:
  8. If they only had traded with the Price Drivers(TM)! :rolleyes:
    murray t turtle likes this.
  9. smallfil


    Timothy Sykes was interviewed by a money manager seeking a good hedge fund manager on Wall Street Warriors. He did not get the monies. I guess the money manager did not realize he traded penny stocks which cannot be scaled for the tens of millions he was intending to put in the hands of a hedge fund manager. Timothy Sykes weakness is he did not practice proper risk management. It cost him plenty in the end. He hung on like a buy and hold investor despite, the losses!
    murray t turtle likes this.
  10. %% I avoided him+ his penny stocks. But his persistent ads caused me to read his free book. IF there is a good age to take too muck risk + trade penny stocks-young /college is it .:D:D

    I tried to buy his book used,[AMZN] but they raised the bids to much; + he is kind enough to allow free downloads.:cool::cool:
    #10     Mar 1, 2019