There’s no doubt this presidential cycle has been… interesting. The standard pedigree no longer exists, the candidates of the two major parties have the worst net popularity rating (strongly favor minus strongly unfavored) than any other candidate dating back to the 1980’s, and the anticipation of what’s going to happen next is captivating the world.
We don’t like playing political pundit or predictor, but what we can do in this environment is look back on how Managed Futures has performed during previous presidential election years. Of course past (election year) performance is not necessarily indicative of futures results, and there’s nothing to say that it’s coincidental and not correlational.
For more insight, we turn to Andrew Strasman of Totem Asset Group, examining how CTAs have performed in the past. His goal is to specifically see how the top 14 “established” Managed Futures managers that have been around since the 1990’s, performed in the fourth quarter of non-election years compared to fourth quarter performance in presidential election years.
PAST PERFORMANCE MAY NOT BE INDICATIVE OF FUTURE RETURNS
With general elections held only every four years and most firms folding up tent long before hitting their 30 year mark, we just don’t have that much data to work with and a hefty survivorship and reporting bias remain for those that do. Furthermore, the CTA model has changed as fully-funded customer accounts used to earn interest; now they are often notionally funded and what interest? CTA strategies offer a lot more trading exposure than just T-Bill interest, but this should be noted.
We took our 14 firms and divided them into 2 cohorts: 1) the over $1 Billion AUM firms, and 2) the under $1 Billion AUM crowd. The top 3 firms in our lists account for 86% of the entire assets in play – enough to make Pareto blush. And this does not even take into account another $34+ Billion assetgathering monster which is conspicuous in its absence from the list.
It quickly becomes evident how a small number of firms dominate the total assets in this space.
For the over $1B group, trend following likely has a lesser role to play due to capacity constraints of the strategy. These multi-strategy managers also actively engage in other strategies such as: carry, risk parity, counter-trend and permanent portfolio amongst others. And while it isn’t likely that all of the second group remain strict “Pavlovian” trend followers, we might suggest that trend following has a larger role to play in generating returns than it does for the first group.
The following table shows the mean Q4 returns for both Election and Non-Election years, by cohort and firm:
It may be that once market participants all have better information, as in who is going to be the next Commander in Chief and what policies are likely to be in place, they will feel better about marking real world capital expenditures. It may be during a cooling period and waiting for these polices to become clear, many tradable instruments coil into a tightly wound ball which finally releases with new November realizations. And maybe this is just a statistical fluke.
It has been documented that CTA and Trend Strategies trading profiles will start to resemble
those of a “long volatility” or Convex profile, a theme we have touched on several times in our previous monthly essays. While it borders on hubris to think that one can possibly understand all the forces in play on market prices at any time, we may be able to agree that a period of rising volatility will tend to be good for these strategies. And Election Time offers the perfect potential catalyst
Just don’t be like this guy on the right come Fall…