Managed futures, the most effective performing hedge fund methods this 12 months, will proceed to generate prime returns in 2023, argues AQR. Trend-following, which includes taking lengthy and quick positions in predominantly liquid futures contracts throughout currencies, commodities, fastened earnings, and equities, had a powerful comeback after a decade of delivering little in features. The SG Trend Index, which tracks the ten largest funds managed futures funds, gained 36 % within the first three quarters, in accordance to the newest paper from AQR. Meanwhile, the standard 60-40 inventory and bond portfolio misplaced 20 % as macroeconomic situations worsened.AQR’s paper comes as some buyers query whether or not managed futures will proceed to outperform. Some fear that it’s each too late to get into the technique and that its historical past reveals some vital underperformance, notably through the 2010s.But AQR argues that subsequent 12 months will probably be marked by financial volatility and huge market strikes, precisely the situations that favor pattern following. That’s why buyers can anticipate continued outperformance from the technique in 2023.
“There are a number of key challenges impeding a return to a peaceful financial atmosphere, making it unbelievable that financial situations will settle into something resembling their pre-pandemic stability inside the subsequent 12 months or two at a minimal.” Challenges embrace inflation and rising fears of a recession within the U.S. and Europe. Yao Hua Ooi, principal at AQR, mentioned buyers typically concern they’re investing on the prime of the market. But when it comes to managed futures, they do not want to fear about that for 2 causes. First, trend-following tends to do finest when there’s excessive macroeconomic volatility. And when vol is excessive, it tends to persist. Second, the efficiency of pattern following doesn’t have the mean-reversion property, that means there’s no proof suggesting {that a} 12 months of excellent efficiency can be adopted by a 12 months of dangerous returns.“For these two causes, we try to assist buyers focus extra on the long-term diversification good thing about including managed futures to their portfolio and never be so nervous about timing,” Ooi mentioned. Jon Caplis, CEO of PivotalPath, mentioned that rising rates of interest is usually a catalyst for trend-following. Collateral posted as margin for managed futures is primarily held in cash-like securities, akin to Treasury payments. With rising yields, buyers obtain extra passive earnings. “I’d name {that a} tailwind in favor of managed futures methods,” he mentioned. “[Even] if methods find yourself returning zero, they’re nonetheless going to return the risk-free fee.”
The core of the trend-following technique is to “seize the tendency of markets to progressively incorporate new info,” which works finest when the value traits prevail for a very long time, in accordance to the AQR paper. That’s why the technique produced distinctive returns throughout extended market drawdowns. During the dot-com bubble, the SG Trend index returned 51 %, in contrast to a lack of 25 % by the standard 60-40 portfolio. The index gained one other 24 % through the Global Financial Crisis, whereas the 60-40 portfolio went down 35 %.From 2010 to 2019, the common annual return of the SG Trend index stood at 1.8 %, whereas the 60-40 portfolio gained 7.5 %, in accordance to the AQR paper. “The 2010s featured a singular set of basic macroeconomic forces that created an unfavorable atmosphere for persistent worth traits,” in accordance to AQR. But AQR admits it’s not simple to persist with the technique by a flat interval just like the 2010s. It suggests buyers take a diversified strategy in trend-following methods, which could embrace the standard worth pattern, financial pattern, and different markets.
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