Trend-following CTAs performing poorly in 2017 and 2018. Switch to mean reversion?

Discussion in 'Professional Trading' started by helpme_please, Mar 6, 2018.

  1. According to this article, trend-chasing quant funds were 2017's biggest losers, at least up to time of publication. One of the reasons given was low volatility and that trend followers tend to do well during periods of high volatility.

    Chintawongvanich offers three reasons for the change: sector overcrowding, the suppression of notable price moves in either direction due to enduring central bank stimulus, and, relatedly, lows in cross-asset volatility.

    "Trend followers typically do well during periods of high volatility," he wrote.

    Fine. Now come 2018 Feb. According to this article, trend followers post worst returns in 17 years because of volatility spikes. It seems like whether it's high volatility or low volatility, trend followers lose money.

    I wonder what do the professional traders on this forum think about the poor performance of trend-following in recent years. The journalists are not practitioners. I trust more in the opinions of the professionals here. Why do you think trend following has suffered in recent years? Would it be good time to switch to mean reversion?
    MattZ likes this.
  2. MattZ

    MattZ Sponsor

    In my opinion one of the challenges that CTA face is scalability. Essentially, when a new CTA has a few years of good results, he/she may receive a large inflow of new investments. This creates a challenge in terms of execution and risk management. Second, they have a psychological pressure of performance that may affect their decision making as well. Lastly, not all CTAs have the privilege of an organized back office where compliance and allocation must be part of your operation. This is time-consuming so they may start dealing with things outside of trading.
    tomorton and helpme_please like this.
  3. So, I guess it's due to over-crowding in trend-following strategies and too much money going into trend-following CTA funds. I'm surprised investors are pouring money into a strategy that has been performing poorly in recent years. Even the best such as John Henry has given up trend trading.

    MattZ likes this.
  4. MattZ

    MattZ Sponsor

    Again, this is just my opinion: The media and the investment community treat hedge funds (HF) and managed futures as an asset class. It is not. Each CTA and HF are a strategy and clumping them together is a cluster of misinformation. You cant mix a quant, fundamental grain trader, stock index trader, etc. and treat them as one asset class. They may all be trend seeking strategies, but differences in approach, capitalization, experience, execution, and other variables require examination of each one on its own. So the success and failure of each CTA has to be examined in a micro manner, not macro.
    Last edited: Mar 6, 2018
    HobbyTrading likes this.
  5. Maverick74


    Trend following funds are almost the only place to go for inverse correlation to risk assets. People buy these funds to lower their overall portfolio risk, not to make money year after year. The main reason they got caught in the Feb selloff was not because of overcrowding or scaling issues, but because two of the biggest trends most of them were involved in was long indices and long oil, both of which got hit obviously on the selloff. For the most part, they are an excellent complement to a long risk portfolio. It's been a much better investment for diversification vs the long tail funds or the dedicated short bias funds.
    wintergasp, MattZ and helpme_please like this.
  6. Thanks. You provide a good explanation for the poor performance in Feb2008. However, given the wonderful performance of stock indices in 2017, why did trend-following CTAs perform poorly in 2017?
  7. Maverick74


    Most commodities were very choppy. ES trended mostly at the end of the year which is when most CTAs got involved. Bonds were up and down, gold, copper, oil all up and down with no real direction. I suspect most CTA trendies rode the Euro up but that's about it. Nothing really went anywhere.
    helpme_please likes this.
  8. This may be way over my league. When I explored trading strategy in 2015, I ran thousands of optimizations to narrow down to a few strategies (both trend following and mean reversion) that has worked 3 years running. I figure if it worked every year, then something must be right. Those strategies went live in 2015 with mixed result so I shut them down. I still run forward tests occassionally and I found out that 2016 and 2017 are both losers. I imagine those funds got funding because their strategies were right for some length of time. I would be confident too if my strategies worked that well for so long. But something in the market chemistry just change, so much so that even HFT is waning.

    Perhaps the only thing that doesn't change is the fact that market always changes.
  9. Maverick74


    Take a look at Dunn or Crabel. They have performance going back to the 1980's and 1990's. They are churning out 12% a year. Numbers are great with almost no correlation to risk assets.
    #10     Mar 7, 2018