Over at Transtrend BV, Andre Honig frets the outlook for the industry, notwithstanding the uplift from the bond rally of late.
“The dynamics of markets evolve so quickly that CTA systems that have been fitted to the past will not be easily valid for the future,” according to the executive director at the $4.9 billion hedge fund.
Transtrend’s Diversified Trend Program rose 6 percent in March, taking its 2019 gain to 3 percent. It’s long Australian and European bond futures, and betting in a relative-value trade that comparable U.S. debt obligations won’t rally as sharply. “Although we would welcome more trendiness, we must continue to try to see through the distortions in market prices,” said the quant investor.
The fund is short on most commodities except for oil and isn’t building new bullish positions on U.S. stocks.
It might take a sustained downswing to materially boost the industry’s fortunes.
“If we actually see this cycle change, and we do have a bear market, then — unless it’s a one-week event — it could be a very interesting environment for us,” said Kathryn Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group, which oversees about $6 billion. “It usually needs some sort of catalyst and I don’t know what that catalyst will be -- and that’s what frightens me.”
The quant firm has switched from being short almost every asset class last year to being positive on stocks and bonds in 2019, she added.
While the bull run in rates may have boosted performance, the lower-rates-for-longer era caps returns from carry trades and collateral, according to Kaminski.
Muted volatility fueled by dovish central banks can also encourage automated traders to boost leverage to reach return targets, a potentially risky proposition in the current environment. Campbell & Company, a quant with $5 billion, has levered up in the market tranquility, according to Brian Meloon, a cash-equities strategist at the firm.
“The main problem in trend-following in equities is any time you’ve had a bear market, as soon as trend followers were positioned short, you have central banks kicking in and markets recovering really fast,” said SocGen’s Ungari. “If we have a slow grinding bear market in the equity market without a strong reversal, then CTAs could do relatively well.”