Trend-Following Hedge Funds Outpace S&P 500 With 15.7% Return
Quantitative hedge funds utilizing complex machine learning algorithms and price signals are beating the broader stock market this year. By comparison, the S&P 500 posted an 11.7% gain over the same period.
Algorithm Performance Across Global Markets
Trend-following funds, also known as commodity trading advisors or managed futures strategies, process vast volumes of data across equities, bonds, commodities, and currencies to capture sustained price momentum. Industry executives told CNBC that these computer-driven portfolios profited by establishing short positions in U.S. Treasurys ahead of September’s bond sell-off. Those gains compounded earlier returns generated through bullish dollar allocations and long crude oil positions established before the conflict involving Iran.
“CTAs are crushing the rest of the hedge fund world this year,” said Andrew Beer, managing member at Dynamic Beta Investments, in an email to CNBC. Beer noted that the funds were early and contrarian when buying crude oil in January and positioning for rising interest rates before global bond market volatility intensified. “Humans are too emotional to time markets. Machines are much better,” he added.
CTAs avoid relying on bonds as portfolio buffers
Gaussel highlighted that a negative correlation between equities and oil bolstered performance during a year defined by structural shifts.
Traditional diversified portfolios faced headwinds because equities and bonds moved in a positive correlation, reducing the defensive utility of fixed income. “By contrast, the ability of CTAs to go short bonds and short-term rates has proved very beneficial,” Gaussel said, emphasizing that quantitative funds do not rely on bonds to act as traditional portfolio buffers.
CTA risk grows increasingly concentrated
“If September provides any indication, we’re at a point where linkages between the two are now propagating meaningfully into currencies and equity markets as well,” Kung said via email. “The upshot is that CTAs are generally well positioned to buffer traditional portfolios — but the risk in many CTA books has grown increasingly concentrated.”
What are commodity trading advisors and their benchmarks?
What is a commodity trading advisor (CTA)?
A commodity trading advisor is a registered investment manager that uses quantitative programs, statistical models, and price signals to trade futures markets, options, and foreign exchange on behalf of investors.
Which benchmark tracks the performance of managed futures funds?
Societe Generale’s SG CTA Index serves as the primary performance benchmark for the sector, tracking daily net returns of major algorithmic funds managed by firms such as Man Group, PIMCO, AQR, and Winton Capital.
How did trend-following funds outperform traditional 60/40 portfolios?
Algorithmic funds avoided losses by taking short positions in fixed income and capturing momentum in commodities, whereas traditional 60/40 portfolios suffered from a positive correlation between declining stock and bond prices.
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