“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 turn against CTAs comes a decade after they rose to fame for rewarding investors with average returns of 21 percent in 2008. Seeing them as a way to guard their portfolios against unforeseen shocks, institutional investors piled in, sending assets soaring 69 percent to $270 billion in the decade to 2017, according to data provider Eurekahedge.
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.
Part of the problem, according to critics, is too much money now chases the same trends, undermining what traders call "alpha" — the outperformance possible relative to a benchmark.
Perhaps the biggest sign that CTAs are becoming archaic came when David Harding, the British theoretical physicist who popularized CTAs in the 1990s, said in July his Winton Fund would move away from trend-following quants. Winton’s flagship fund cut its allocation to the strategy to about 30 percent from 50 percent.
“The models are designed for a non-crazy-headline environment”
By year-end, investors had pulled $5 billion from Winton’s funds, bringing assets under management to $23.6 billion. Industry wide, a total of $18.4 billion left CTAs, the most of any hedge fund strategy anywhere, according to eVestment data.