Managed futures, probably the greatest performing hedge fund methods this 12 months, will proceed to generate prime returns in 2023, argues AQR. Trend-following, which includes taking lengthy and quick positions in predominantly liquid futures contracts throughout currencies, commodities, fastened revenue, and equities, had a powerful comeback after a decade of delivering little in beneficial properties. The SG Trend Index, which tracks the ten largest funds managed futures funds, gained 36 p.c within the first three quarters, in accordance to the newest paper from AQR. Meanwhile, the normal 60-40 inventory and bond portfolio misplaced 20 p.c as macroeconomic circumstances worsened.AQR’s paper comes as some traders query whether or not managed futures will proceed to outperform. Some fear that it’s each too late to get into the technique and that its historical past reveals some vital underperformance, notably throughout the 2010s.But AQR argues that subsequent 12 months might be marked by financial volatility and enormous market strikes, precisely the circumstances that favor pattern following. That’s why traders can anticipate continued outperformance from the technique in 2023.
“There are a number of key challenges impeding a return to a relaxed financial surroundings, making it unbelievable that financial circumstances will settle into something resembling their pre-pandemic stability inside the subsequent 12 months or two at a minimal.” Challenges embrace inflation and rising fears of a recession within the U.S. and Europe. Yao Hua Ooi, principal at AQR, mentioned traders usually concern they’re investing on the prime of the market. But when it comes to managed futures, they do not want to fear about that for 2 causes. First, trend-following tends to do finest when there’s excessive macroeconomic volatility. And when vol is excessive, it tends to persist. Second, the efficiency of pattern following doesn’t have the mean-reversion property, which means there’s no proof suggesting {that a} 12 months of excellent efficiency can be adopted by a 12 months of dangerous returns.“For these two causes, we are attempting to assist traders focus extra on the long-term diversification good thing about including managed futures to their portfolio and never be so nervous about timing,” Ooi mentioned. Jon Caplis, CEO of PivotalPath, mentioned that rising rates of interest could be a catalyst for trend-following. Collateral posted as margin for managed futures is primarily held in cash-like securities, similar to Treasury payments. With rising yields, traders obtain extra passive revenue. “I might name {that a} tailwind in favor of managed futures methods,” he mentioned. “[Even] if methods find yourself returning zero, they’re nonetheless going to return the risk-free price.”
The core of the trend-following technique is to “seize the tendency of markets to regularly incorporate new data,” which works finest when the worth traits prevail for a very long time, in accordance to the AQR paper. That’s why the technique produced distinctive returns throughout extended market drawdowns. During the dot-com bubble, the SG Trend index returned 51 p.c, in contrast to a lack of 25 p.c by the normal 60-40 portfolio. The index gained one other 24 p.c throughout the Global Financial Crisis, whereas the 60-40 portfolio went down 35 p.c.From 2010 to 2019, the common annual return of the SG Trend index stood at 1.8 p.c, whereas the 60-40 portfolio gained 7.5 p.c, in accordance to the AQR paper. “The 2010s featured a novel set of basic macroeconomic forces that created an unfavorable surroundings for persistent value traits,” in accordance to AQR. But AQR admits it’s not straightforward to stick to the technique by means of a flat interval just like the 2010s. It suggests traders take a diversified strategy in trend-following methods, which could embrace the normal value pattern, financial pattern, and different markets.
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