Trend Following Performance Report — May, 2022

Overview

May brings a necessary breather for the trend following community. Fortunately, this time we haven’t seen the typical retracement that occurs after a series of consecutive months of positive performance. This month we just paused at our high watermarks, erected our tents for a bit of a rest and just enjoyed the scenery from a very high vantage.

From above we saw the train-wreck that was below. No signs of a resurging equity market, no signs that bonds had found their bottom, no signs of a resurging crypto-currency market…. just the eerie sounds of market silence. Perhaps our ascent will continue.

This is an unusual moment for the community and may be the sign of the ‘new times’ where uncertainty is here to stay. We already know with a bit of data snooping into June that the trends have taken off again…but that story is for next month’s report.

May 2022 Trend Index Performance

May saw the TTU TF Index, the BTOP50 Index and the SG Trend Index have a well-earned breather at these Index high watermarks.

The TTU TF Index posted a modest loss for the month of -1.49% locking in the YTD total at 15.96%, the BTOP 50 saw a small positive gain for the month of 0.48% bring the YTD result to a strong 15.1% return and the SG Trend posted a 0.82% return for the month bringing the YTD result to 9.7%.

To understand he slight differences between these indexes we need to understand how they are constructed.

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 present. Previously the Programs needed to be a constituent of the SG CTA Index and the 10 largest Managers was not a requirement.

The current listing of the 10 eligible programs in the Index for 2022 are as follows:

The performance of the SG Trend Index since 1st January 2000 to 31 May 2022 is seen in Chart 1 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, you will notice that the long-term performance in terms of CAGR is different. The SG Trend plots midway between the underperforming BTOP50 Index and the over performing 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 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.

Like the SG Trend Index, the BTOP50 Index is also designed to track the performance of the largest Programs by AUM but the Programs included may not be Trend Following Programs.

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 2022 there are 20 funds in the Index comprising the following Programs:

The performance of the BTOP 50 Index since 1st January 2000 to 31 May 2022 is seen in Chart 2 below:

You will notice how the BTOP 50 Index is fairly 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 Indexes. There is a significant representation of Trend Following Programs in the Index, however the non-trend following Programs contribute to this underperformance.
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. In fact, it is our strong opinion that the ultimate risk measure to apply in any form of Fund selection is not a proxy risk metric such as the Sharpe, Sortino, MAR ratio, Ulcer Index or Serenity ratio but rather the long-term validated track record itself.

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 at 31st May 2022, the TTU TF Index comprised 59 Programs

The performance of the TTU TF Index since 1st January 2000 to 31 May 2022 is as follows:

Now you might be intrigued by the performance result of the TTU TF Index. While it is clearly correlated with the BTOP 50 Index and the SG Trend Index, we can clearly see that long term performance of the TTU TF Index clearly outstrips alternative Index measures. The dominant contributor to this outperformance can be attributed to 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 a selection process based on ‘market appeal’ as opposed to a selection process based on ‘performance’. This ultimate ‘risk measure’ used for the selection process translates into superior performance over the long term.

Furthermore, by including all Programs which meet this ‘track record’ criterion means that we don’t need to cherry pick from amongst a few individuals to happen to be large Programs. This 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. This is why we seek to strive for maximum market and system diversification with our individual programs. The TTU TF Index just takes this diversification one step further and diversifies across different TF Programs to deliver a superior risk-adjusted result.

TTU TF Index Performance to 31st May 2022

For the period from 1st January 2000 to 31st May 2022, the TTU TF Index has produced a Compound Annual Growth Rate of 8.75% with a Maximum Drawdown of 17.58% (Refer to Chart 3). 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 6.68% with a Maximum Drawdown of 50.95% over the same period (Refer to Chart 4).

TTU Trend Barometer as at 31st May 2022

The TTU Trend Barometer is also reflecting that markets are taking a breather for May with a drop in the Barometer reading to 43 when compared to the reading in April 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.

May 2022 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.

• 190 Systematic Investor Series ft Rob Carver - May 1, 2022
• 191 Systematic Investor Series ft Richard Brennan - May 7, 2022
• 192 Systematic Investor Series ft Mark Rzepczynski - May 15, 2022
• 193 Systematic Investor Series ft Jerry Parker - May 22, 2022
• 194 Systematic Investor Series ft Alan Dunne - May 29, 2022
• 195 Systematic Investor Series ft Richard Brennan - June 5th, 2022

Top Traders Unplugged Trend Following Program (TTU TF Program)

You may have noticed that in the Systematic Investor Series I have have been mentioning from time to time 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.

May saw a negative result of -3.43% with the current Drawdown slightly increasing to 13.49% Refer to Chart 6 and Table 1).

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 1st January 2007 to 31st May 2022.

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 May 2022 of our Top 5 Selection Method using the Serenity Ratio was an increase of 0.30% bringing the YTD result to 2.46% (Refer to Chart 7). 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 SP500TR Index (-0.05).

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 May 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 8 below showcases the comparative performance results for the period 1^st January 2000 to 31 May 2022 of:

1. A 100% investment in the S&P500TR portfolio
2. A 100% investment in the VBIAX which is a suitable proxy for the classic 60% Equity/40% Bond portfolio
3. A 100% investment in a 60% S&P500TR 40% Serenity portfolio and
4. 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 9 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.