Yellen & Draghi saves the world...but spoils it for CTAs
Investors in "traditional" assets and hedge funds cheered as Captain Yellen and her Co-Pilot (Draghi) once again decided that the world needed another injection of speed whilst maintaining the same course of action we have seen in recent years, namely QE and ZIRP.
However, if you were to ask any commercial pilot about what to do when you hit turbulence, they would say...
"the first thing you need to do is to reduce your speed and consider changing your course"
Clearly trend followers are more like real pilots and in dealing with the market changes we saw in March and thus many of them reduced their "speed" (exposure) whilst going through a bit of turbulence in their performance. Clearly most trend followers would have landed safely at the end of Q1 with respectable performance to show for it.
OK...now back to the Trend Barometer which on a closing basis ended the month of March on a very weak note.
Firstly, let’s look at where the trend Barometer finished the month;
The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors;
We saw a shift in market trends in March. As the US$ got weaker due to Central Bank policy decisions and thus created more up-trends in markets like AUS$ (AD), CAN$ (CD) and the Swiss Franc (SF), trend strength was reduced in the European bond markets (GL & GM). Another noticeable change was in the Energy markets where the down-trends got crushed. In fact, within the commodity markets, only Bean Oil (BO) and Corn (C2) exhibited trending behavior at the end of March.
In the chart below, I have grouped the markets into 10 sectors. ONLY 1 out of 10 Sectors finished the month in a trending state (Currencies), so investors should not expect their trend following managers to be able to make money in this environment.
In fact, it was more about preserving capital in March as markets went through their transition due to Central Bank policy decisions.
The last chart shows the evolution in the Trend Barometer since January 2015.
During the month of March we only had 2 daily readings above the "break-even" level of 45% in the Trend Barometer, clearing documenting how difficult the conditions were for trend followers.
Although trend following as a strategy would have taken a hit in March, Q1 2016 will still go down as a positive quarter, which not many strategies can claim. It reminded us of the benefits of "conditional" correlation, meaning CTAs ability to be negatively correlated when equity markets crash but also have the ability to be positively correlated during equity bull markets.
With additional downward pressure on short-term interest rates, investors will have to look for REAL alternatives to their fixed income exposure...and who knows, perhaps they realize the value of "conditional" correlation.
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.