CTAs slide into the red in January, as volatility rips through trend-following hedge funds’ initial gains

Tom Wrobel, Societe Generale

A spike in market volatility led CTAs and other managed futures hedge funds to hand back their initial early-year returns last month, as gains in commodities and bonds were outweighed by losses in currencies and equity indices.

Though two out of the three daily CTA benchmarks produced by Société Générale were in the black entering the final week of January, increasingly see-saw market patterns ultimately torpedoed the sector’s mid-month advance, SocGen said on Friday.

The main SocGen CTA Index, a daily performance benchmark comprising a select pool of 20 of the largest managed futures strategies, slumped to a 1.14 per cent loss in January.

At the same time, the SG Trend Index – which tracks the largest 10 trend-following hedge funds’ performance – finished the month down 0.75 per cent, having been up some 2.5 per cent at one point mid-month.

Short-term strategies fared even worse.  Société Générale’s Short-Term Traders Index, which tracks daily returns for CTAs and global macro managers with 10-day trading windows, dropped 1.59 per cent in January amid what SocGen described as a “difficult market environment throughout the month.”

A small handful of CTAs managed to hang on and finish the month in the black, SocGen said, with two trend followers, one non-trend, and one shorter-term CTA withstanding the late pressure to deliver positive performance.

“After a strong finish to 2020, with CTAs delivering record performance in December, gains were initially extended into 2021 before a spike in volatility made conditions harder for many CTA strategies, including trend-following,” explained Tom Wrobel (pictured), director of capital consulting at Société Générale Prime Services and Clearing.

Commodity market movements served up strong investment opportunities as prices trended upwards, while managers also captured continued downward momentum in US government bonds.

However, the recent US dollar weakness trend was reversed, which disrupted trend-following strategies’ earlier profit momentum. In addition, the volatility that ripped through stock markets towards the end of January halted the earlier advance, potentially heralding further CTA losses depending on their positioning, SocGen’s trend indicators show.

“Despite realising losses in aggregate during January, there were some CTAs that posted profits and many market trends continued to produce positive opportunities for CTAs,” Wrobel observed.

Despite a tricky start to 2021, institutional investor interest in CTAs remains high following their commendable performance last year.

He added: “Historically CTAs have described themselves as ‘long-volatility’ so as new potential market regimes are revealed they may be well placed to navigate those markets both up and down.”