Elevated volatility bodes well for nimble short-term trend followers

Stormy sunset

Shorter-term managed futures strategies are gearing up for further episodic spikes in volatility in the coming months, leading to more opportunities to capitalise on continued market unpredictability.

Trend followers largely withstood March’s market turmoil, notching up generally positive returns as other hedge fund strategies fell by the wayside amid growing Covid-19 pandemic fears.

But while CTA performance on the whole was somewhat mixed – the SocGen CTA Index closed the month at 0.09 per cent as medium-term managers’ gains in bonds and currencies was offset by equity losses – it was shorter-term strategies who soared amid the carnage.

Short-term CTAs are now the best performing strategy in 2020, advancing almost 4 per cent during the first quarter, having finished March up 0.72 per cent on average, according to recent Société Générale data.

Speaking to Hedgeweek, one London-based short-term managed futures official – whose strategy surged more than 10 per cent last month– suggested the downturn marks the beginning of an equity bear market, which has ultimately caught many managers off-guard.

“If you are a trend follower and you are trading equity indices, bonds and currencies, you need some time to flip positions - you need a strong enough signal that lasts long enough for you to go from long to short,” the official said on Wednesday.

“Global indices hit new peaks just before the crash, so those longer-term CTAs who were long equities suffered losses.”

In contrast, short-term strategies can more nimbly seize on the switch and take up positions more quickly.

“Every asset class was positive for us. We saw the VIX index shooting up to 80-90, which we haven’t seen in a long time, but there was also a lot of volatility in other assets too,” the official said.

“It’s now fair to expect that volatility in markets will continue. Volatility will stay high – perhaps not as high as in March, but certainly higher than in the past 10 years - and that should be able to translate into better trading opportunities for us and similar strategies. If you trade shorter futures, that brings more opportunities across more asset classes.”