AHL Evolution

Best Performing Managed Futures Fund

Originally published in the April/May 2013 issue

Man AHL Evolution aims to produce return patterns that are lowly correlated with traditional, trend following CTAs. This objective is not, however, pursued through trading in the opposite direction of prevailing market trends. Instead, the main approach is to apply AHL’s tried and tested momentum models to a wider investment universe, in many dimensions: as well as trading more asset classes and markets, the programme drills down into more granular subsets of existing asset classes – such as equity sectors. The search for more market breadth and depth is intended to enhance the chances of finding strong trends somewhere, says AHL/MSS Executive Chairman Tim Wong.

In recent years, corporate credit and emerging market debt have generated more persistent trends than many other asset classes. Consequently, these fixed income assets accounted for the bulk of Man AHL Evolution’s 23.6% return in 2012 and 14.4% through April YTD. The programme currently obtains credit exposure through selling CDS (credit default swap) protection on various credit indices such as CDX and iTRAXX. Although the programme has owned credit for several years since the crisis there is no hard-wired long credit bias. When and if credit markets show a sufficiently sustained pullback, the programme could cut and reverse into a short stance that would involve buying CDS protection. Hence credit exposure was scaled back in 2011 and the strategy was short in 2008 during the financial crisis.

Credit was the first asset class traded by the programme back in 2005, with many other markets being steadily added since then including interest rate swaps, over the counter commodity markets, bespoke equity sector baskets, volatility indices, and European electricity. While historical price action is still the main predictive tool, the programme has started to add some fundamental data signals, initially for the equity sector baskets traded which are partly constructed according to value criteria. Whereas markets traded by traditional CTAs have increasingly moved in lockstep, average correlations among Evolution’s growing investment universe have stayed low and stable at around 0.10 over the past 7 years.

This has helped Man AHL Evolution to act as a useful diversifier for traditional CTA exposure – and it has also shown a near zero correlation to global equities. The programme has continued to perform even as the “Risk On, Risk Off” market backdrop has been challenging for traditional CTAs. There are logical explanations for the limited correlation. For instance, many so called emerging markets are now developed enough to have monetary policy cycles that are independent of the ZIRP (zero interest rate policy) that applies in many developed markets. Trading interest rates in emerging currencies lets Evolution get exposure to both rising and falling interest rate cycles in different countries. Average annual returns above 16% over the past 7 years show how the programme has successfully picked up trends that were neglected by many CTAs.

Last year was exceptional in that all asset classes traded contributed positively over the full year, but AHL is far from complacent. The search for new sources of diversification continues, with research an ongoing process that entails collaboration with Oxford University through the OMI (Oxford Man Institute). One of the things the 94-strong team of researchers based in London are currently looking at is adding even more markets with higher barriers to access, which can show lower correlations to more easily accessible markets. To this end new types of operational infrastructure are being developed. Volatility trading models are being fine-tuned, and some new systems using fundamental data to trade commodities are being added. While AHL uses algorithms to improve cash equities execution efficiency, high frequency trading is not a focus, as Evolution has similar, multi-month, average holding periods to other AHL programmes. As the name of the programme suggests, its evolution is very much continuing. Most of the current assets in Man AHL Evolution are a sub-allocation from AHL’s larger flagship programme, but the strategy is also open to direct investments.