Trend-following quants are rallying back on Wall Street for their best start to a year since 2008, thanks to relentless stock market gains and sharp moves across the commodity complex. 

Winners like Mulvaney Capital Management Ltd., founded by a former Merrill Lynch options trader, have notched a 45% gain in February alone by riding strong trends in niche markets such as agriculture, while equities have soared day in, day out amid the artificial-intelligence euphoria. It’s a similar story for DUNN Capital Management LLC, whose flagship $930 million fund has jumped a bumper 31% this year, according to a person familiar with the matter.

Fueled by the latest advance in global shares, AQR Capital Management LLC enjoyed its second-best month on record in February across at least three trend-following strategies.

The diversified cohort, known as commodity trading advisers, typically ride the momentum of futures markets of all stripes to harness the wisdom of the investing crowd. While trend-following funds come in all shapes and sizes with various allocation horizons, an index compiled by Societe Generale SA shows the strategy eked out a 7.7% return over the first two months of the year. That’s the best run since 2008, according to data since 1999.

All this is a tentative reprieve from the sharp market regime shifts over the past year that challenged this breed of systematic hedge fund.

“There are just good trends happening across the board,” said James Dailey, Chief Executive Officer of DUNN. “CTAs have done particularly well when equities have done really well and when they have done really bad.”

DUNN’s World Monetary and Agriculture Program reaped a 19.6% gain in February by riding the Big Tech-driven equity rally and one-way trends in agricultural commodities, from cocoa to grain.

2023 Reversal
It’s a turnaround from 2023, when CTAs saw their returns wrecked by asset-price swings. Initially pummeled by worries over recession and interest-rate hikes, equities then soared as the AI frenzy took hold and the Federal Reserve signaled it would pivot to an easier policy stance. The cohort, which takes long and short positions in the futures marketplace, nursed a 4.2% loss last year per SocGen. 

Now as the U.S. economy powers ahead and mega-cap companies continue to deliver on their earnings promise, the trend-following strategy in equities is on course for the best quarter in 10 years, according to Societe Generale. Additionally, commodity bets including long cocoa as well as short soybeans and sugar, have boosted returns for the broader category.

With CTAs’ equity exposure in the 70th percentile over the past decade, “there is still room to increase long positions should the equity rally continue,” said Sandrine Ungari, head of cross-asset quant research at the French bank. 

Meanwhile Connecticut-based AQR’s Managed Futures Strategy Fund returned 7.9% in February, while its Managed Futures Strategy Higher Volatility Fund—which uses leverage to target higher volatility—netted 12%. Both strategies benefited from long exposure in stock indexes, particularly in Japan and the U.S.

“We’re seeing trend following work well across virtually almost all the asset classes that we pursue,” said Yao Hua Ooi, principal at AQR. 

Buoyed by big moves in soft commodities, Paul Mulvaney reckons the best days for trend following are still to come. His $360 million firm has just seen its second-best month of performance since he founded it in 1999. 

Cocoa futures, for instance, saw the biggest monthly advance in February in more than two decades, as bad weather and disease hit crops. Raw sugar futures tumbled last month on expectations of robust supply, while soybean prices were undermined by signs of lackluster Chinese demand. 

“This is the best environment for trend following in over 40 years,” said Paul Mulvaney. “Economic and geopolitical shocks have set hares running and, regardless of the official inflation numbers, we’re still seeing it manifest in various futures prices.”

This article was provided by Bloomberg News.