What was all the fuss about?
There was a lot of “needlessly nervous or useless activity” around mid-May when volatility spiked and equities wobbled for a day or two.
May 17th will be remembered by trend following investors, for the simple reason that it was one of those painful days where trends reversed as a group…with nowhere to hide for trend based strategies.
The reason doesn't really matter, even though it lies in our DNA to try and find the Why this happened. It could have been any of a number of reasons as the month of May unfortunately saw terror strike again in Europe, a sword dancing Trump, a UK election that just got more exciting by the day…the list is long.
But thinking about it…a spike in volatility from historic lows…is really not that surprising.
Perhaps what is more surprising, is that it did not last more than a day or two!
…so many investors are probably left with one big question on their mind..
Should you buy managed futures because volatility is low?
There is not clear answer to this question. The opinion of some, that managed futures is a long volatility strategy is not entirely validated when looking at the VIX…but neither should it be, because a single instrument would never be able to capture the behavior of diversified CTA strategies as a whole.
But history have taught us, that if you as an investor need some level of protection against big corrections in stocks or bonds, then medium and long-term trend following is a strategy you MUST have in your portfolio. However if you are looking for more of a “straight hedge” in the short-term, then most likely, short-term CTAs are perhaps a better fit for your portfolio.
Firstly, let’s look at where the trend Barometer finished the month;
The overall Trend Barometer finished exactly where it started…namely at the break-even point of 45…which supports the early indications of a flat performance of all trend following indices – and a positive finish by short-term managers.
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 decreased slightly from 16 to 15 during the month. No one single market stood out in terms of trend strength, but a handful or so markets showed solid trending behavior at the end of the month
In the chart below, I have grouped the markets into 10 sectors. Since last month, the number of sectors exhibiting an overall trending state remained unchanged at 3 out of 10 sectors, thanks so the broad based improvement.
The Equity & Soft sectors dropped out of the “group of 3” and were replaced by Grains and Interest Rates, whilst Meats retained is trend state, thanks to a 17% surge in Lean Hogs.
As we head in to the month of June which no doubt will be dominated by the UK election in the first week and continued confusion over the future relation between the EU and UK and Europe and the Trump administration, I expect that spikes in volatility will become more frequent.
And at some point these spikes will turn out to be more than just one or two day nervous activity, and investors will realize that in order to be able to sleep better at night, having an allocation to uncorrelated strategies such as trend following is a way to overcome an uncertain future of economic and political chaos.
The last chart shows the evolution in the Trend Barometer since January 2015.
The Trend Barometer closed for the second month in a row, at its break-even point of 45. Despite this gradual improvement compared to Q1 of this year, the pattern of short term spikes in fear of a stock market correction, did not make it easy to navigate for longer term managers
There are plenty of good reasons why so-called “Multi Asset Portfolio” continues to grow in popularity. With uncertainly rising and potential return from traditional asset classes being hard to come by…as an investor, you need to broaden the palette of investment types that you get exposure to.
The good news is that many of these Multi Asset Portfolio managers have embraced the value that trend following brings in a diversified multi asset class portfolio, and I'm optimistic that more investors will benefit from some level of protection when the next “real” crisis begin, compared to the last financial crisis…which so many investors seem to have happily forgotten about.
Promise me to make sure that you don't forget about the events that took place about a decade ago and that you tell your children, who may not have experienced it….AND make sure that you don't put your portfolio at risk for a Repeat performance
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
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.