2019 CTA Strategy Review

No keeping up with stocks

RCM Alternatives, Chicago, USA
Originally published in the February | March 2020 issue

It was a decent (not great) year for the many different vessels sent out to sea across the quant, managed futures, and global macro space, with CTAs enjoying their best year since 2014 – as evidenced by the SG CTA Index returning 6.26%. But no matter your captain’s method of attack out on the choppy sea of the markets, there was no keeping up with nearly 30% gains in the stock market.

We mentioned in our 2020 Outlook that managed futures/global macro owe a thank you note to global bonds, showing that the index was up +11.77% when bonds were down -5.39% the rest of the year, and that was the story for the classic managed futures trend following strategy type

Elsewhere, short term systematic and the volatility trading segments were dominated by the mostly too steady march higher in equities and resulting decline back towards record lows in the VIX. Ag traders saw some brief love from normal conditions like flooded fields and herd disease derailed by tweets and trade talks over the year.

Here’s our review of each strategy type in 2019, starting off with that big bond trade in trend following.

Trend following and systematic global macro

2019 Performance: Average 

Trend following and systematic macro saw nearly all of their 2019 gains come from interest rates and the fixed income sector, earning enough in those profitable sectors to offset a forgettable year for the strategy across trades in currencies, equities, and commodities. Trend followers typically have significant exposure to world bond markets; with their large volume, deep liquidity, and many different flavors (Japanese bonds, Aussie bonds, US 5s, 10s, 30s, and more), and a shared trend across different bond markets can add significantly to returns. That was most of the story in 2019, where interest rates across the world fell – even negative rates getting more negative.

Elsewhere, the trend reversal in May as well as August hurt long stock index positions, while commodities and currencies did not provide much help, with both sectors lacking trends throughout the year, except Palladium – which exhibited the strongest trend in the commodity sector climbing and eye popping +60%. We guess those catalytic converters aren’t going away anytime soon?

Summary: Trend followers with large bond exposure did well. Those that are more diversified and/or heavier weighting towards commodity markets underperformed. 

Notable Managers that we work with:

  • Rational Resolve (I) RDMIX: +18.32%
  • EVE GTAP Plus Fund: +16.92%
  • County Cork Acclivity LLC: +16.46%
  • EMC Alpha Plus: +15.80%
  • Red Rock Global Macro: +13.83%
  • Campbell Managed Futures: +11.80%

Short term systematic

2019 Performance: Below Average 

Similar to long-term trend followers, short-term systematic strategies enjoyed their best year since 2014 with gains of +3.32% as measured by the SG Short Term Traders Index. Headwinds included the volatility of volatility steadily increasing throughout the year (a proxy for how many quick whipsaws the market sees), which is perhaps why there was a wide dispersion in returns from this group; notably Crabel Capital Management Multi-Product having another good year at +8.41% while short term rival Quantitative Investment Management finished the year in the red at -1.45%. Crabel and QIM have long been the kings of the short-term CTA space, but for investors looking for less known names in the space on to watch is Linnis, LLC who’s Linnis ONE program made 22.57% in 2019. Congrats to the Linnis team for a breakout year. 

Short-term day trading strategies that look to take a chunk out of large day moves finished the year relatively flat as there simply weren’t that many big move days to take advantage of, as evidenced by a below average percent of days finishing near their daily highs/lows, which is where day trading models really shine. Members of this group include Deep Field Capital ICA, 3D Capital Management, and Numeri. 

Discretionary global macro

2019 Performance: Very Mixed 

Perhaps the biggest news in this sector from 2019 was Louis Bacon shuttering his famed Moore Capital Management fund to outside investors, joining the recent trend of hedge fund legends shutting down due to lack of market opportunities. In our neck of the woods, lesser known Three Rock Capital Management was sold to Julius Baer as performance flatlined and investors pulled back; further highlighting how tough of an environment discretionary traders have endured. The blame for the tough environment continues to be artificial market interference by the world’s central banks, which in turn has caused volatility to crater not just in equities, but across tangential markets like currencies and bonds. And the never-ending bull market in stocks, which continues to prove all manner of theories about the next market crash or recession wrong. As Matt Laviolette of Breakout Funds put it on a put it on a recent podcast….”We went from global possible war to booming peace time in 45 minutes”. That’s hard to trade. Luckily, it wasn’t all bad news for global macro traders however, as the newer Breakout Funds mentioned above had an excellent year finishing up +11.73%. Breakouts shorter time frame as well as their quantitative trade process certainly helped in what was another year of struggle for traditional discretionary macro traders. 

Commodity and sector specialists

2019 Performance: Poor 

2019 was a tough year to be a commodity trader as well as a grower. A very wet spring in the Midwest gave those farmers who were lucky enough to get their crop in the ground a late start to the growing season, while others were forced to file insurance claims. However, despite the tough conditions, the USDA reports farmers planted 89.7 million acres of corn, all in the face of the trade war which was far from being resolved for most of the year. Prices ended the year pretty much where they started, and outside of a brief rally in corn from May to July there wasn’t much to trade on. GammaQ was the top performer in the ag sector by a large margin ending the year at 15%. 

Likewise, livestock traders saw a 33% move in lean hogs from March to early April due to Chinese swine flu concerns, only to give most of that back. But if you missed that trade you probably did not have a great year. Programs like Sector Arc and Wharton that specialize in hog trading had a tough year, while Alternative Capital Advisors caught the “Hogdiculous” move, but then fought to hold on the rest of the year. 

Energy traders saw crude oil prices climb 30% from the January lows to $66 a barrel in April before settling in the $50 – $60 range for the remainder of the year. The September weekend attack on a Saudi Oil facility did not have a lasting effect on oil prices, but as tensions remain high that could change in a heartbeat. There were some profits to be had and Jaguar Aegir came out ahead +3.56% while doing a nice job managing risk throughout the year. 

In precious metals long Palladium was the trade of the year with prices soaring 60% as governments around the world crack down on car emissions, increasing the demand for the metal used in the production of catalytic converters. Palladium is a notoriously thin market where trends can quickly reverse and because it is lightly traded Palladium is not included in many managed futures portfolios. One manager that does trade Palladium along with other precious metals is Commodity Asset Management (CAM) in New York who finished 2019 at +8.62%.


2019 Performance:
Short Vol = Good
Long Vol = Below Average

We’re not sure what to make of the volatility trade in 2019…. It was sort of normal, but sort of not. There was the standard erosion of VIX, but then some noise as well – but not too much noise. It was….something. What it wasn’t was a repeat of 2018 (or 2017 for that matter). Coming off the December ’18 stock selloff the VIX opened 2019 in the mid 20’s, but gradually fell back down to earth and was nearly cut in half by March. May was a head fake for vol traders as trade war tweets spiked the VIX but this caused more pain for many volatility traders due to the timing of the tweets on a Sunday afternoon. August was the best month overall for most vol traders as the VIX popped early and several times throughout the month 

Market neutral volatility / vol arb was mixed bag with programs like Covenant Total Volatility Fund, Typhon Proteus, and Certeza 4x Macro Vega having decent years, while Pearl Capital struggled. 

Short Volatility, meanwhile, did just fine despite the May and August moves higher -with the high vol start to the year a nice setup for down trending vol throughout the year. There are not as many managers to track here as in there were in the past but a couple that we follow Warrington Asset Management and Flora Lake Partners both had good years.