Longtime trend-following chronicler Michael Covel says it is too early to tell whether the transition to offering trend following through large, low-volatility 40-Act funds is a good thing.
“The big thing about all these different structures that are unfolding in the last six, seven, eight years is that it’s probably going to be another decade before we can all look back and ask, ‘How did that shake out?’” Covel says. “I don’t think we are going to know the result of all these structure and all large aggregated funds like AQR or Ray Dalio until something happens that’s different [than the trend] from March of 2009.”
Parker is not worried. “Because of technology, it’s just cheaper to trade and add clients and raise money going into mutual funds. It is still a great business; you just need to raise a lot more money. To some degree the AUMs and the stability of the business are going to be much better. Charging 2 and 20, you have to trade larger, your drawdowns are going to be larger and your AUM is going to fluctuate more. Your business model is way more stable.”
One thing Covel and Parker agree on is that it is a mistake to focus solely on trend-following’s tendency to perform well in down equity markets, so-called crisis alpha. While managed futures’ performance during poor equity markets has been strong, its main advantage is non-correlation and ability to do well in all market conditions.
“I agree with Jerry Parker that the idea of selling it only has crisis alpha is a mistake,” Covel says. “It is part of this investment strategy but clearly you can make a lot of money [in trend following] whether stocks are cratering or not. It is that double-sided coin. The business is multiple.”
That is one of the reasons Parker uses stock futures and not just indexes. Managers can earn strong returns in bull equity markets. Perhaps not so much when those bull markets are the product of central bank interventions as Covel points out, but 2010 and 2014 were strong years for CTAs and equities soared in those years.
The crisis alpha claim, while true, is a product of an era the industry was begging for crumbs from the table. Parker doesn’t think it needs to do that. It is multiple and growing and Parker is looking forward to what comes next.