Trend Following Performance Report — February, 2024

Overview

February 2024 has unfolded as a banner month for the trend following community, offering a tapestry of opportunities that can best be described as trend following heaven. The month was marked by pronounced movements across a diverse array of markets, from the volatility of commodities like Cocoa, the digital frontiers of cryptocurrencies such as Bitcoin, to the traditional bastions of equity indices like the Nikkei 225 and the S&P500 Index. These markets have not just performed; they've excelled, guiding the trend following community to new pinnacles of success.

The beauty of trend following lies in its universal application across market environments and asset classes. However, it's the inherent diversity within these universes of opportunity that often dictates the variance in performance among different programs. February's achievements were, in no small part, due to the exposure to major outliers in these markets. While dispersion is an inevitable facet of the trend following landscape, the TTU TF Index provides a clear barometer of success, showcasing the substantial gains of globally diverse Trend Following Programs. A closer examination of the Top Ten Lists within this report will reveal the depth and breadth of this month's achievements.

Among the plethora of opportunities, Cocoa and Bitcoin emerged as the standout performers of the month. Their trends didn't just unfold; they exploded, carving deep into outlier territory and dominating the discourse in most trend following portfolios. These assets exemplify the essence of trend following, embodying the wisdom of Ed Seykota's adage, “it only takes the occasional big trend to pay for them all.” February was a testament to this principle, with these explosive movements contributing significantly to the ongoing success of many portfolios.

For many trend followers, the victories of February were not merely a product of serendipity but the culmination of months, if not years, of disciplined strategy. The current landscape of strongly trending markets has been a goldmine for those who have been diligently riding these waves. The explosive moves observed in February have not only contributed to the gains of the past month but have been integral to the success stories of portfolios over the last 12 to 24 months.

As we reflect on the achievements of February 2024, it is crucial to recognize the enduring principles that underpin the success of trend following. The ability to capitalize on the right trends, the discipline to follow through, and the resilience to weather the periods of variability are what define the successful trend follower. Looking ahead, the trend following community remains poised to navigate the complexities of the markets, armed with the insights and experiences of months like February.

February 2024 stands as a beacon of what is possible in the realm of trend following. It serves as a reminder of the power of outliers, the importance of market diversity, and the enduring value of disciplined strategy.

February 2024 Trend Index Performance
In February, the TTU TF Index saw a significant jump, achieving a 6.61% rise that boosted its performance since the beginning of the year (YTD) to a notable 7.38%, indicating a strong opening for 2024. In a similar vein, the BTOP 50 Index witnessed strong growth, climbing 4.28% during the month, which led to a YTD growth of 5.42%. Additionally, the SG Trend Index also experienced a substantial increase of 6.45% in February, resulting in a YTD growth of 7.72%.

SG Trend Index

The SG Trend Index is designed to track the 10 largest trend following CTA’s of the managed futures space.

Criteria for inclusion in the Index as determined by Society Generale is as follows:
• Must trade primarily futures (including FX forwards);
• Must be broadly diversified across asset classes;
• Must be an industry recognized trend follower;
• Must exhibit significant correlation to trend following peers;
• Must be open the new investment; and
• Must report returns on a daily basis (net of fees).

The index currently is:
• Equally weighted;
• Calculated in base currency;
• Has an inception date of 1st January 2000;
• Rebalanced annually on 1st January; and
• Reconstituted annually on 1st January based on eligibility criteria.

There was a slight modification to the Index from January 2013 to the present. Previously the Programs needed to be a constituent of the SG CTA Index and the 10 largest Managers was not a requirement.

For the 2024 year following the rebalance of the Index we say goodbye to the Winton Trend Program and hello to the AQR Managed Futures Program. The listing of the 10 eligible programs in the Index for 2024 were as follows:

The performance of the SG Trend Index since 1st January 2000 to the end of last month is seen in Chart 2 below:

You will notice how the SG Trend Index is highly correlated with the BTOP50 Index and the TTU TF Index and uncorrelated with the S&P500TR Index.

Despite the high correlation between the various trend following Indexes, the long-term performance of these three Trend Following Indexes in terms of CAGR is different. The SG Trend Index plots between the BTOP50 Index and the TTU TF Index.

BTOP 50 Index

The BTOP50 Index seeks to replicate the overall composition of the managed futures industry with regards to trading style and overall market exposure. Unlike the SG Trend Index and the TTU TF Index, the BTOP50 is not strictly a trend following Index and is more broadly representative of the entire managed futures segment of which a dominant style is trend following. We like to think of the BTOP 50 as a ‘quasi trend following Index’ as opposed to a pure trend following Index.

Like the SG Trend Index, the BTOP50 Index is designed to track the performance of the largest Programs by AUM, however the Programs included may not be all Trend Following Programs. Criteria for inclusion in the Index as determined by Barclay Hedge is as follows:

Criteria for inclusion in the Index as determined by BarclayHedge is as follows:
• Must be a Program represented in the Barclay CTA Universe;
• In each Calendar year, the Programs selected must in aggregate be no less than 50% of the investable assets of the Barclay CTA Universe;
• The Programs must be open for investment;
• The Manager must be willing to provide Barclay Hedge with daily return performance;
• The Program must have at least two years of trading activity; and
• The Program’s advisor must have at least three years of operating history.

The index currently is:
• Equally weighted;
• Rebalanced annually on 1st January; and
• Reconstituted annually on 1st January based on eligibility criteria.

Despite the ’50’ tag in the BTOP 50 description, for 2024 there were 19 constituents in the Index. For the 2024 year we say goodbye to CoreCommodity Management, Global Sigma Group, Winton Capital and say hello to DBi Managed Futures.

The performance of the BTOP 50 Index since 1st January 2000 to to the end of last month is seen in Chart 4 below:

The BTOP 50 Index is highly correlated with the trend following Indexes of the SG Trend Index and the TTU TF Index, however its long-term performance is the lowest of the 3 Trend Following Indexes. While there is a significant representation of Trend Following Programs within the Index, the non-trend following Programs contribute to this diluted long-term performance.

TTU TF Index

The TTU TF Index has been developed by Top Traders Unplugged to provide a performance measure of the trend following programs with a long-term track record.

At TTU, we recognise the importance of a robust trading approach to these uncertain markets and feel that AUM is not a good robustness measure when it comes to assessing performance of the Trend Following industry. It is our strong opinion that the ultimate selection measure to apply in constituting a Trend Following Index is not AUM or a proxy risk metric such as the Sharpe, Sortino, MAR ratio, Ulcer Index or Serenity ratio. The superior metric to assess long-term performance is the long-term validated track record itself.

We have therefore developed a different method for constructing our TTU TF Index. The criteria for inclusion into our Index is as follows:

The criteria for inclusion into the TTU TF Index is as follows:
• Monthly performance results need to be captured in the Nilsson Hedge CTA database;
• Must be geographically diversified across asset classes;
• Must be fully systematic in nature using quantitative rules for entry and exit;
• Must possess at least a 15-year unbroken track record to the current reporting month;
• Must adopt trend following as their dominant investment strategy;
• Are currently active programs; and
• Must report performance monthly (net of fees).

The Index:
• Is Equally weighted;
• Is Rebalanced monthly;
• Is Reconstituted monthly;
• Has an inception date of 1st January 2000

As of February 29, 2024, at the time this report was written, the TTU TF Index includes results from 46 Programs. The Index's monthly return is calculated based on the average return of these Programs that have submitted their reports for the month. Out of a total of 58 active Programs, 46 have provided their monthly reports. The table below details the 12 Programs that are still pending submission of their reports as of the reporting date.

The performance of the TTU TF Index since 1st January 2000 to to to the end of last month is as follows:

Now you might be intrigued by the performance result of the TTU TF Index. While it is highly correlated with the BTOP 50 Index and the SG Trend Index, we can see that long term performance of the TTU TF Index clearly outstrips alternative Index measures.

The dominant contributor of this outperformance is the requirement for any participating Program in the Index to have a long-term track record. You see, using AUM as a criterion for inclusion is not necessarily a useful selection criterion. While AUM reflects ‘market appeal’, it does not imply that this ‘market appeal’ is strongly correlated with ‘long term performance’.

Our process of Index construction gives us an insight into how any diversified ensemble of trend following Programs with a long-term track record approaches an optimal portfolio as we increase the number of Programs in the Index. Simply by diversifying into a large ensemble of Trend Following Programs with a long-term track record, we magically improve the Index result. CAGR is increased and our drawdowns are reduced.

Of course, we already know this ‘diversification’ principle of Trend Following. As we increase our diversification efforts, we obtain improvement both in terms of the maximum drawdown and in the CAGR generated by the ensemble. This is why we seek to strive for maximum market and system diversification within our individual programs. The TTU TF Index just takes this diversification one step further and diversifies across many different TF Programs to deliver a superior risk-adjusted result.

TTU TF Index Performance

For the period from 1st January 2000 to 29th February 2024, the TTU TF Index has produced a Compound Annual Growth Rate of 8.10% with a Maximum Drawdown of 16.89% (Refer to Chart 6 above). This compares favorably against the performance of the S&P500 Total Return Index (includes dividends) which has produced a Compound Average Growth Rate of 7.20% with a Maximum Drawdown of 50.95% over the same period (Refer to the chart below).

TTU Trend Barometer

The TTU Trend Barometer saw a notable increase in its reading, from 25 in January to 50 in February, reflecting improving trending conditions.

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.

Aside from the occasional dispersed readings when compared to overall trend following performance this method is surprisingly powerful in describing CTA monthly performance and can be used to connect market trading environments to resultant Manager performance.

The Macro Environment

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.

You can find all of our weekly conversations by clicking this link.

Top Traders Unplugged Trend Following Program (TTU TF Program)

You may have noticed that in the Systematic Investor Series I have have in the past mentioned my proprietary system which I traded before joining DUNN Capital Management.  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.

The TTU Trend Following Program is also a kind of experiment for me, as I decided not to make any changes to the design or parameters in the program since about 2013, to see how a medium-term trend following strategy would perform without any new research and improvements.

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 (albeit not as long-term as others) 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 during market regimes that are more volatile and uncertain, although in 2022, its shorter-term models (Group 3), have had a difficult time.

In February 2024, the TTU Trend Following Program experienced a growth of 2.84%, which adjusted its total for the year to a decrease of -4.34%. For an in-depth analysis, please see Chart 9 and Table 10.

Top 10 Lists

We have prepared the following Top 10 lists (excluding non-reporting Programs) for various performance categories based on monthly performance returns for a 15-year period commencing 1st January 2009 to the current month.

Top 10 Listing – by Compound Annual Growth Rate

Top 10 Listing – by Risk Adjusted Return (Serenity Ratio)

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:

1. Top 5 Performers by Compound Annual Growth Rate (CAGR) using a rolling lookback of 15 years.
2. Top 5 Performers by MAR ratio (CAGR/Max Draw%) using a rolling lookback of 15 years.
3. 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 February 2024 of our Top 5 Selection Method using the Serenity Ratio was an increase of 12.70%. (Refer to Chart 21).

For the entire reporting period, this selection method produces a CAGR of 5.35% with a Maximum Drawdown of only 14.44% and effectively a “zero” correlation to the S&P500TR Index (-0.06).

We mentioned in our recent podcast on the Systematic Investor Series Episode 283 that the Serenity selection for 2024 would be announced in this monthly report. So without further ado, having updated our data sets with results from 2023, the 2024 Serenity selection is as follows:

This selection will be applied for the investment period between 1st February 2024 to 31st January 2025:

• Man AHL: AHL Evolution;
• Man AHL: AHL Aplha;
• Quantica Capital AG: Managed Futures Program;
• Man AHL: AHL Dimension; and
• Mulvaney Capital Management: Global Diversified Program.

The 2024 Serenity selection is as follows and will be maintained for the investment period between 1st February 2024 to 31st January 2025:

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 23 below showcases the comparative performance results for the period 1 January 2000 to the end of last month:

1. A 100% investment in the S&P500TR portfolio;
2. A 100% investment in the VBMFX which is a proxy for the bond market;
3. A 100% investment in the VBIAX which is a suitable proxy for the classic 60% Equity/40% Bond portfolio;
4. A 100% investment in a 60% S&P500TR 40% Serenity portfolio; and
5. A 100% investment in the Serenity Portfolio.

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 28 below.

Important Disclaimers

This document is directly solely to Accredited Investors, Qualified Eligible Participants, Qualified Clients and Qualified Purchasers. No investment decision should be made until prospective investors have read the detailed information in the fund offering documents of any manager mentioned in this document. This document is furnished on a confidential basis only for the use of the recipient and only for discussion purposes and is subject to amendment This document is neither advice nor a recommendation to enter into any transaction. This document is not an offer to buy or sell, nor a solicitation of an offer to buy or sell, any security or other financial instrument. This presentation is based on information obtained from sources that TopTradersUnplugged (“TTU”) (“considers to be reliable however, TTU makes no representation as to, and accepts no responsibility or liability for, the accuracy or completeness of the information. TTU has not independently verified third party manager or benchmark information, does not represent it as accurate, true or complete, makes no warranty, express or implied regarding it and shall not be liable for any losses, damages, costs or expenses relating to its adequacy, accuracy, truth, completeness or use.

All projections, valuations, and statistical analyses are provided to assist the recipient in the evaluation of the matters described herein. Such projections, valuations and analyses may be based on subjective assessments and assumptions and may use one among many alternative methodologies that produce different results accordingly, such projections, valuations and statistical analyses should not be viewed as facts and should not be relied upon as an accurate prediction of future events. There is no guarantee that any targeted performance will be achieved Commodity trading involves substantial risk of loss and may not be suitable for everyone

TTU is not and does not purport to be an advisor as to legal, taxation, accounting, financial or regulatory matters in any jurisdiction. The recipient should independently evaluate and judge the matters referred to herein. TTU does not provide advice or recommendations regarding an investor’s decision to allocate to funds or accounts managed by any manager (“or to maintain or sell investments in funds or accounts managed by any manager, and no fiduciary relationship under ERISA is created by the investor investing in funds or accounts managed by any manager, or through any communication between TTU and the investor

In reviewing this document, it should be understood that the past performance results of any asset class, or any investment or trading program set forth herein, are not necessarily indicative of any future results that may be achieved in connection with any transaction. Any persons subscribing for an investment must be able to bear the risks involved and must meet the suitability requirements relating to such investment. Some or all alternative investment programs discussed herein may not be suitable for certain investors This document is directed only to persons having professional experience in matters relating to investments. Any investment or investment activity to which this document relates is available only to such investment professionals. Persons who do not have professional experience in matters relating to investments should not rely upon this document.

This document and its contents are proprietary information of TTU and may not be reproduced or otherwise disseminated in whole or in part without TTU’s prior written consent.

This document contains simulated or hypothetical performance results that have certain inherent limitations AND SHOULD BE VIEWED FOR ILLUSTRATIVE PURPOSES. Unlike the results shown in an actual performance record, these results do not represent actual trading. HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR INVESTMENT ACCOUNT.

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.