Is 3-Year Data Meaningful? (2/14)

Trend following is the best investment strategy to combine with indexing because it is the only style of growth investing that has repeatedly delivered gains when equities have crashed. Still, the article below focuses on the disappointing three-year performance.

Over the past 27 years, the S&P 500 had six periods in which it delivered a negative total return over a three-year stretch. The average loss was -17%, and the two worst declines were -38% and -23%.

However, at year-end 2013, the Systematic Index, which tracks over 450 trend following managers, delivered a three-year total return of -8%. This was the only negative three-year total return for trend following over the same 27 year period.

See slide 9 of our ETF Trend Following presentation.

The bottom line is that trend following strategies have delivered a growth return that is uncorrelated to equities, and trend followers manage well over $200 billion worldwide. Slides 5 and 6 show that the combination of indexing and trend following actually delivered an “escalator-like” growth return stream.

Unfortunately, three-year data is not always a meaningful indicator. This is most difficult for investors to accept, especially when the same issues can apply to five and 10-year periods as well.

Quant Funds Feel Investor Bite After Underperforming

Chris Larson, 2/18/14

Investors are losing patience with hedge-fund managers who rely on computers to follow global market trends after three years of underperformance.

Quantitative hedge funds run by companies such as Man Group Plc (EMG) and Michael Platt’s BlueCrest Capital Management LLP saw investors pull $4.9 billion in the last three months of 2013, the most in five years, according to Chicago-based data provider Hedge Fund Research Inc. That followed outflows of $1.1 billion in the second quarter and $668 million in the third, HFR said.

It was the largest quarterly outflows for the quant funds since the first three months of 2009, when investors desperate to get their hands on cash amid the financial crisis pulled $5.7 billion, according to HFR. In all, the funds had $1.7 billion of outflows last year compared with $9.5 billion of inflows in 2012 and a record $25 billion in 2011, HFR data show. HFR estimates quant funds now manage about $224 billion worldwide.

“The last three years have been a tough period for nearly all managed-futures funds,” Svante Bergstrom, who runs a quant fund at Stockholm-based Lynx Asset Management AB, wrote in a report to investors this month. “Some investors have started to become impatient and are considering moving their assets to investments where they believe they have better opportunities to achieve a good return.”

Three Years

For pension funds and other institutional investors, three-year results are important in making allocations, and 2013 marked a third year of underperformance for the quants: the Newedge CTA Index, which tracks 20 large trend-following funds, fell 2.9 percent in 2012 and 4.5 percent in 2011. The funds climbed 0.7 percent in 2013, still trailing both the Bloomberg Hedge Funds Aggregate Index’s return of 7.4 percent and the Standard & Poor’s 500 Index (SPX), which rose 30 percent.

Over the three years ending Dec. 31, the Newedge index fell an average of 2.2 percent each year, while the Bloomberg Hedge Funds Aggregate Index rose 2.3 percent annually.

“Trend-following strategies are cyclical, and right now is not a great environment for them,” said Rob Koyfman, a senior strategist at Paris-based Lyxor Asset Management Inc., which reduced its assets in such funds late last year. “If it gets better, we’d like to move more money into them, but right now isn’t really favorable for those funds.”

Models Vary

The funds use computer models to try to predict movements of stocks, bonds and commodities. Sometimes called managed-futures funds or commodity-trading advisers, the funds then try to profit by buying and selling securities based on those forecasts. Each manager has its own computer models, which can lead to a wide range of returns.

Quant funds had one of their best years in 2008, when the Newedge CTA Index rose 13 percent, far outperforming the S&P 500, which fell 37 percent. All hedge funds dropped 19 percent that year, according to HFR’s Fund Weighted Composite Index.

Click here for the full article.




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