Trends are back!
There is no guarantee that just because trend followers broke out in 2014 there will be clear sailing ahead, but it appears that the Fed will continue to step back and allow fundamentals to rule. And if they reverse course at this point, it would most likely be because of some extraordinary equity market disruption, the type that typically creates a strong environment for trend followers.
Bergin says that with quantitative easing ramping up in Europe just as the U.S. Fed is preparing to tighten, that divergence in policy should be good for the market. “Europe and Asia seems to be taking on a different profile that bodes well for CTAs. But we don’t know.”
A bigger threat to active management may the complaints about fees and the number of index funds attempting to create managed futures beta.
“It is normal for people to be frustrated with poor performance in the alternative space, particularly managed futures. People focused on fees but at the end of the day, if you aren’t making money it is hard to do well,” Abraham says.
He expects strong performance will temper complaints on fees. “Price is not the only thing. If it was I would be eating spam all the time instead of a rib eye steak. I’ll pay more for the steak than spam. To replicate trend-following systems is not that hard, but what is really difficult is to do what we did, make a trend-following model that will give you a [high] Sharpe [ratio].”
“There is a lot to be said for active management,” Waksman says. “It is alive. You have someone at the controls who has the ability to readjust, re-evaluate, to keep testing. A lot has been said about index funds, that the single biggest problem with active management is the fee structure. Go tell that to someone whose funds just made 35% last year.”
It is a bottom-line business and a bottom-line world. While volatility is often seen as a bad thing, it is what drives returns. “Volatility is a good thing, volatility is very different from risk,” Wieczorek says. “Volatility is what we use to throw us up to the next level. By cutting losers and riding winners we harness and skew that volatility to the upside and skew returns to the upside.”
So far 2015 looks to be a pretty volatile year.
“It is like weather in Texas,” Abraham says. “In the last several years we have had droughts but we had droughts before and they passed, and the rains come and things get back to normal; hopefully this is the end of the drought in managed futures, [though] there is always another drought in the future.”