One of the cons of being able to distribute information so easily through the internet is that there’s constant commentary, constant speculation, and constant updates. In the finance world, it seems that it’s almost become a game to “call” when the market is finally going to turn. But it seems everyone just reads the articles, gets a moment of anxiety, and then ignores it like everyone else. The thing is there’s no penalty or repercussion of people being wrong and for those that call when the market is going to turn hope that they happen to be right, setting up their career for TV appearances, book deals as “market experts.”
This has particularly been on our mind when talking about the world of global macro and managed futures. 2017 hasn’t been a great year. The year before that wasn’t either. Neither was 2015. 2014 was a blip of surging performance thanks to a collapse in crude prices. But in the wake of the seemingly never-ending bull run in equities and performance of all things short volatility; there continues to be speculation as to whether long volatility, macro type strategies, and models have what it takes in the modern market. John Curran who runs a (A Family Office) writes in Barron’s there are plenty of alternative investment strategies thriving, they just aren’t trend following:
THERE IS a running debate as to whether trend-following is a dying strategy. There is plenty of anecdotal evidence that short-term and mean-reversion trading is more in vogue in today’s markets (think quant funds and “prop” shops). Additionally, the popularity of passive investing signals an unwillingness to invest in “idea generation,” or alpha. These developments represent a full capitulation of trend following and macro trading.
Volatility in the commodity markets is nowhere to be seen and Volatility of Volatility (VIX) remains extremely low.
But the accumulation of many small losses in a low-volatility and generally trendless market has robbed them of confidence and the psychological balance to embrace any new paradigm proactively. They are frozen with fear that the lower- return profile of recent years is permanent—ironic in an industry that is paid to capture price changes in a cyclical world.
One market legend with whom I spoke suggested he wouldn’t have had the success he enjoyed in his career had he begun in the past decade. Whether or not this might be true, it doesn’t mean that recent lower returns are to be extrapolated into the future, especially when these subpar returns occurred during the quantitative-easing era, a period that is an anomaly.
But Curran says this is actually the moment to pay attention to trend following. A sort of “buy the dip”/invest when there’s blood in the streets of Macro/Long Vol type strategies (something we’ve talked about before here:
I have been fortunate to ride substantial bets on big trends, earning high risk-adjusted returns using time-tested techniques for exploiting these trends. Additionally, I have had the luxury of not participating actively full-time in macro investing during this difficult period. Both factors might give me perspective. I regard this as an extraordinarily opportune moment for those able to shed timeworn, archaic assumptions of market behavior and boldly return to the roots of macro investing.
In the article, Curran explains why he thinks the time is right for long vol strategies. But it isn’t your normal argument that it’s due for a rebound just because it’s been down recently. He’s got some more interesting reasoning behind the assertion, pointing mainly at the shifting paradigm in how oil is bought and sold around the world (becoming less reliant on the U.S. dollar) as well as China’s desire to pay for those exchanges of oil in their own currency as well as Russia.
This paradigm shift won’t happen overnight, and as it is said in the article, “Nobody rings a bell at key turning points.” We won’t know exactly when things changed until after the fact. But Curran , a CTA Intelligence Award winner in the newcomer division, for their Commodities and Discretionary Macro program seems to think this shift is the perfect opportunity to capture returns:
The ability to properly anticipate change is predicated upon detached analysis of fundamental information, applying that information to imagine a plausible world different from today’s, understanding how new data points fit (or don’t fit) into that world, and adjusting accordingly. Ideally, this process leads to an “aha!” moment, and the idea crystallizes into a clear vision. The thesis proposed here is one such vision.
Leave it to macro and managed futures to underperform right when everyone was looking at them in 2009, and crush it when everyone’s given up on them in 2018.