Here we are in April and the revelry continues. April simply further adds to the high watermarks being enjoyed by the Trend Following community. For many Trend Following Programs, the past four months has already surpassed the best of our annual returns for the last decade. We clearly are in the midst of something special that we haven’t seen for a long time.
This month the previous trending favourites such as commodities were eclipsed by the currencies which saw significant trending opportunities in many currency pairs.
Of course, we need to suppress our enthusiasm as we observe a painful ride for many long only investors with a significant allocation towards the market favourites of Equities, Bonds and Crypto, but within our trend following community where we globally diversify using long and short price following techniques, we can certainly slap a number of backs for sticking to their guns while the attention was focussed towards the ‘easy money’ associated with a bull market. Times have changed and the going might not be so straight forward for the investment community used to the fruits of recent times.
Where to from here we are asking ourselves? Well hopefully the ride continues for the Trend Following folk.
April 2022 Trend Performance Summary
April saw a number of Programs achieve their best monthly return YTD. We preserved gains already achieved in the commodities, experienced some new exponential accelerations in Natural Gas and watched as the currency pairs decoupled into some majestic trends.
We of course were all anticipating trend reversals this month given the exceptional performance YTD, but unlike recent history, such reversals were nowhere in sight. We certainly are in an uncertain environment where history has very little to say.
The April result for the TTU TF Index saw a strong increase of 4.67% bringing the Calendar year result to a healthy 17.8%. The joy was widespread as the median return for Programs included in the Index was 5.18% with the highest monthly return recorded of 26.43% and the lowest of -4.92%.
The TTU Trend Barometer is also reflecting favourable trending conditions with a current reading of 64.
The Trend Barometer is a proprietary tool we use at TTU to assess the trend strength of a diversified portfolio consisting of 44 markets across all sectors. We firstly subdivide the trend strength of each market of a hypothetical diverse portfolio into five ranges from strong up, medium up, neutral, medium down and strong down. We then aggregate these results into a single portfolio number which we use to describe the overall trend strength across a hypothetical Program portfolio.
We then arbitrarily divide this percentage range into 3 where a value of 0-30 is considered a very unfavourable market regime for trend following Programs, a range between 30 to 55 is a somewhat neutral environment for Trend Following Programs (but not an environment where you could expect consistent performance) and values more than 55 are considered to be a favourable regime towards Trend Following Programs, where they should see good performance.
This method is surprisingly powerful in describing CTA monthly performance and can be used to connect market trading environments to resultant Manager performance.
Monthly Market Wrap
Aside from the uncertainty with geo-political tensions in Ukraine this month saw Central Banks commencing their move towards increasing interest rates in an attempt to take the inflationary heat out of the global economy. This of course saw the continuance of trends in the global financial markets as the markets continued to transition towards an unknown future equilibrium.
For a blow-by-blow macro wrap for the month, we recommend you listen to our weekly systematic investor series by clicking on the links below. It is also worthwhile listening to our past catalogue as it provides you with an understanding of how these markets can shape the emotions of a Trader and why it is therefore essential that Trend Followers adopt systematic rules-based processes to keep these emotions in check.
- 186 Systematic Investor Series ft Richard Brennan – April 3rd, 2022
- 187 Systematic Investor Series ft Tim Pickering – April 10th, 2022
- 188 Systematic Investor Series ft Jerry Parker – April 17th, 2022
- 189 Systematic Investor Series ft Alan Dunne – April 24th, 2022
- 190 Systematic Investor Series ft Rob Carver – May 1st, 2022
Top Traders Unplugged Trend Following Index (TTU TF Index) Performance
Using the excellent and free public sources of Fund Manager return data provided by Nilsson Hedge we create a Trend Following Index comprising those Programs which meet our definition of Globally Diversified Systematic Trend Following Programs. To meet this definition a Program must be:
- Geographically diversified across a broad array of asset classes that include soft commodities, energies, metals, bonds, fixed income, foreign exchange, and equities;
- Fully systematic in nature using quantitative rules-based processes for entry and exit decisions;
- Possess at least a 15-year unbroken track record up to the current month; and
- Adopt Trend Following trading techniques as the dominant investment strategy within the Program.
Having identified those Programs that meet this definition, we then create an Index by monthly rebalancing with equal weighting and cheekily refer to it as the TTU TF Index. Our Index comprises a total of 60 Programs over the Performance monitoring period from 1 January 2000 to the current month of 30 April 2022.
For the period from 1st January 2000 to 30 April 2022, the TTU TF Index has produced a Compound Annual Growth Rate of 8.77% with a Maximum Drawdown of 18.04% (Refer to Chart 1). This compares very favourably against the performance of the S&P500 Total Return Index (includes dividends) which has produced a Compound Average Growth Rate of 6.70% with a Maximum Drawdown of 50.95% over the same period (Refer to Chart 2).
For the month of April 2022, The TTU TF Index increased by 4.67%. Alternative Trend Following Indexes (Refer to Chart 1) such as the Barclays Top 50 Index (BTOP50) and the Société Générale Trend Index (SG Trend Index) experienced a strong increases of 5.22% and 7.06% respectively for the month.
Chart 1 – TTU TF Index Performance
Chart 2– S&P500TR Index Performance
Top Traders Unplugged Trend Following Program (TTU TF Program)
You may have noticed that recently in the Systematic Investor Series I have been showcasing my proprietary system which I traded before my involvement with DUNN. I have taken my listeners under the hood to better understand the thinking behind the design process of this trend following model in the following episodes:
- 120 Systematic Investor Series – January 2nd, 2021; and
- 121 Systematic Investor Series – January 6th, 2021.
We have continued to track the performance of this trend following model on an ‘after fee’ NAV basis simply to provide a context for my listeners to understand how the performance of this classic trend following model performs against other, perhaps more recent Trend Following Programs whose methods have ‘drifted’ away from the traditional Trend Following roots.
Despite a difficult drawdown period between May 2015 to Feb 2019, the TTU Trend Following model continues to perform strongly during market regimes that are more volatile and uncertain.
April saw a slight negative result of -1.46% with the current Drawdown slightly increasing to 10.41%.
Chart 3 – TTU TF Program Performance
Table 1 – TTU TF Program Monthly Returns
Top 10 Lists
We have prepared the following Top 10 lists for various performance categories based on monthly performance returns for a 15 year period commencing January 1, 2007 to 30 April 2022.
1. Top 10 Listing – by Compound Annual Growth Rate
2. Top 10 Listing – by Risk Adjusted Return (Serenity Ratio)
3. Top 10 Listing – by Last 12 months Performance
Performance Results for the TTU Top 5 by Serenity Ratio
In a recent research project, we undertook at TTU, we examined three different allocation methods that could be deployed by an investor seeking to optimally allocate investment funds towards 5 of the Top ranked Globally Diversified Systematic Trend Following Programs with a long-term track record.
These three methods adopted 3 different forms of performance metric, namely:
- Top 5 Performers by Compound Annual Growth Rate (CAGR) using a rolling lookback of 15 years.
- Top 5 Performers by MAR ratio (CAGR/Max Draw%) using a rolling lookback of 15 years.
- Top 5 Performers by Serenity Ratio using a rolling lookback of 15 years.
The findings of our project can be obtained by clicking on this link.
Our research determined that the optimal selection method was the Serenity Ratio method.
The Performance for the month of April 2022 of our Top 5 Selection Method using the Serenity Ratio was an increase of 1.53% bringing the prior 12 months return to a result of 4.15% (Refer to Chart 4). The ‘Serenity’ selection method continues to perform exceptionally well from a risk-adjusted perspective. For the entire reporting period, this selection method boasts a CAGR of 5.32% with a Maximum Drawdown of only 14.44% and effectively a “zero” correlation to the SRP500TR Index (-0.05).
Chart 4 – Performance Results of the Top 5 Allocation Method (Serenity Ratio)
The current selection of Top 5 Funds that have been recommended by this research for the investment period between 1st February 2022 and 31st January 2023 are as follows:
- Man AHL: AHL Evolution;
- Fort LP: Global Contrarian;
- Fort LP: Global Trend
- Salus Alpha Capital: Directional Markets (DMX); and
- Man AHL: Alpha
Individual Performance Results for these 5 Programs used for the Serenity allocation as at 31 March 2022 are as follows:
Performance Results for the Alternative 60/40 portfolio using the TTU Top 5 by Serenity Ratio
In our “How to Invest with the Best” blog post, we also highlighted the significant improved risk-adjusted performance results that could be achieved by replacing the 40% allocation to Bonds in the traditional 60/40 portfolio with an allocation of 40% towards the TTU Top 5 by Serenity ratio.
The evaluation compared the performance of a traditional 60% Equity/40% Bond portfolio against a 60% Equity/40% Serenity portfolio to highlight the uncorrelated historical nature of this Alternative 60/40 portfolio and demonstrate the benefits that a sizeable allocation towards the Serenity portfolio would bring to an investor if equity and bond markets go back to their historic relationship and become more positively correlated in the future. There is no guarantee that correlations remain static over time and it is possible that bond markets and equity markets may lose their uncorrelated relationship that has existed in the last 20 years or so. It is far less likely that the TF managers within the Serenity Grouping will ever be strongly positively correlated to the Equities market, over the long run, given the extensive global diversification and ability to go long and short, that is present within the constituents of the Serenity Grouping.
Chart 5 below showcases the comparative performance results for the period 1st January 2000 to 30th April 2022 of:
- A 100% investment in the S&P500TR portfolio
- A 100% investment in the VBIAX which is a suitable proxy for the classic 60% Equity/40% Bond portfolio
- A 100% investment in a 60% S&P500TR 40% Serenity portfolio and
- A 100% investment in the Serenity Portfolio
Chart 5 – Comparative Performance Results of Various Portfolio Allocations
The comparison of alternative portfolio allocations above highlights the strong historic risk adjusted returns that have been enjoyed by 60% S&P500TR / 40% Serenity Composite Portfolio.
A more detailed assessment of this powerful 60/40 investment option is reflected in Chart 6 below.
Chart 6 – Performance Results for the 60% S&P500TR/ 40% Serenity Composite
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ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM OR OTHER ASSET.
There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results. No representation is being made that any investment will or is likely to achieve profits or losses similar to those being shown.