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Market Trends for January 2018

2018 - CTAs off to the best start in YEARs!


2018 is off to a great start...period.

January was a month that made many CTA investors smile again, regardless of whether they are exposed to short-term or long-term strategies.

The strong start to 2018, comes after a challenging year for many managers in the space.

This puts the Systematic Diversified CTA's in the Top 3 of the 20 or so hedge fund strategies tracked by Hedge Fund Research for the past 12 months...probably a bit of a surprise to many hedge fund investors who generally believe that other hedge fund strategies tend to do much better than CTAs.

But it shouldn't come as a surprise to anyone. Because history shows that when these types of strategies have been "below par" for a while, they always come back with a roar!

Now sure, we can spend time discussing what drove the performance, and we will further down in this post...but to some extent it does not really matter.

At least not when you are a fully diversified, 100% systematic investment manager, who are not trying to predict the future.

Yet most investors still prefer to invest in strategies led by charismatic managers who claim they know where the markets are going...i.e. who invest the "conventional" way.


Well, partly because investors prefer to be "conventionally" wrong instead of "un-conventionally" wrong according to Mohamed El-Erian, whom I saw speak at a conference in Miami this week.

In other words, they would rather lose more by investing the "conventional" way (like most of their peers), than doing the right thing and invest how they should, using non-correlated strategies, because of the risk of losing during a period of time where their "conventional" peers would be doing better.

It's sad that this is the way most assets are invested on behalf of so many investors around the world.

But hey...we can always hope that in a world where many "conventional" assets are perceived to be pretty fully priced, that investors will open their eyes (and portfolios) to other ways of extracting profits from the markets.


Now, let’s look at where the trend Barometer finished the month;
2018-01_TB with Heading

The overall Trend Barometer strengthen during the month of January and spent a lot of the time on some of the highest levels we have seen in a long time and finished at a reading of 52...what I consider as a solid positive reading. Early indications are that all CTA indices will be positive and post strong numbers for the month, as confirmed by the trend barometer.

This includes short-term strategies, that are finally enjoying an increase in volatility after a tough 2017.

The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors;

The number of markets recorded in a trending state increased from 19 to 23 during the month. Strong up-trends were recorded in Energy and Metals as well as many of the Currencies, whilst the Fixed Income markets turned in the strongest down-trends, in particular the US 10-year bonds (please note that I do not track the US 30-year bond, which probably would have shown the same development in January).

2018-01_Markets with Heading

In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state increased from 2 to 3 out of 10 sectors (4 if we count Base Metals which was borderline)... still a low number but much better than what we saw in all of 2017.

But it may surprise you to see that Stock markets, which put in a strong performance in January, are not part of this group of trending sectors. This is because not all of the stock markets that the Trend Barometer tracks, did as well as the US markets during the first month of 2018, which led to the overall sector not having a strong enough overall reading.

I think it's good to see more sectors starting to participate from a trending perspective, so we don't end up relying on stocks to do all of the heavy lifting...

There are still many CTAs that have not yet reached new all-time highs despite the strong start for the year...and as I'm a strong believe in that most if not all of them will reach this at some point, I'm optimistic about 2018...EVEN THOUGH, that with increased market volatility we should expect more volatility (Up and Down) in the performance of trend following managers.

BUT remember, volatility and risk are not the same thing!

2018-01_Sectors with Heading

The last chart shows the daily trend barometer chart for the past 3 years.

As you can see the TB spent a great deal of time above 45 during the month of January, which is really what made the month so strong when it comes to manager performance. Sustained level of trending behaviour is the best environment of these strategies.

And when this happens...they never disappoint.

As an industry, we don't control the environment that we operate in, only how we respond to it. And it is the response of each manager that will dictated how good they are at delivering performance to your as an investor.

I was shocked, but not surprised, to see that at this week's industry conference in Miami, 86% of Allocators asked by the organizer were looking for managers with a track record of less than 5 years!

Are you kidding me...

This means that only 14% of Allocators were focused on the managers with real long-term experience in this industry.

I wonder if they would get the same response, if they asked about what level of experience the would like to see from the air-line pilots that would be flying them home from the conference?

All I can say to these allocators are...

don't get dazzled by short track-records that seemingly have found a way to deal with this recent type of market environment.

don't be fooled by the cheap trend following offerings that do NOT reward the manager for delivering great performance.

In my opinion, you get what you pay for and as in any business, experience is priceless and managers who can demonstrate that their approach has not only survived real crisis periods but also continues to thrive during this recent low vol, but potentially high risk always worth having in your portfolio!

Stay tuned to follow the trends in what looks to be an interesting year for many asset classes!

2018-01_TB Evolution since 2015


I hope you found the information useful as part of your own evaluation of the trend following part of your investment portfolio. I will continue to do my best to keep you up-to-date with regards to the environment for diversified trend following strategies and would love to discuss any of this information with you. Just reach out to me.

P.S. if you want to follow the Trend Barometer on a daily basis, please click here and if you want to see the list of Market Symbols explanations, please click here.

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