Quantitative-driven, trend-following hedge fund shops such as MAN AHL, one of the world’s biggest mangers of managed-futures funds, also know as commodity trading advisers (CTAs) suffered the worst slump in its 23 year history last year, despite a strong equity bull market.
Man AHL is part of Man Investments, an alternative-investment firm and the asset management division of UK-listed Man Group, the world’s largest publicly traded hedge firm.
According to data by hedge-fund research and index-tracking firm Credit Suisse/Tremont, CTAs turned in average losses of 6.6%. Among the worst hit was Man AHL’s flagship fund, MAN AHL Diversified plc, which is registered in Singapore and available for sale to local accredited investors. It suffered record losses of 16.9% in 2009 and experienced its worst one-year drawdown of 18% from 2 March 2009 to 8 Feb 2010. Man AHL Diversified plc had not seen an annual loss since its inception in 1996. Man AHL, which managed about US$20 billion as at end 2009, lost about US$1.2 billion in assets in the three months ended December 2009.
According to Della Casa, Head of Research at Man Investments’ analysis and strategy group, the erratic trend shifts in the equity, currency, commodity and bond markets were the main reason for the poor performance of Man AHL and other CTAs. He observes that many asset classes, with the exception of equities, were basically ‘trendless’ over the past 12 months. “A CTA or managed –futures manager needs to have certain strong trends and that was not the case for many markets last year.” CTAs typically do not make large allocations to stocks. The FX and interest-rate allocations are typically about two thirds of a CTA, and equity exposure, depending on the opportunities, could be around 10% to 25%. In addition, That is why the performance of many of these funds was not lifted by the strong equity bull market last year.
Historically, CTAs turned in respectable profits in stressful year like 1998, bear markets from 2000 to 2003. Ulrich Keller, Chief Investment Officer of Alternative Funds Advisory at UBS Global Asset Management adds that sophisticated investors can use CTAs as a hedge against market downturns or during times of uncertainty. Tim Rainsford, Managing Director of Asia-Pacific at Man Investments, highlights that CTAs have a negative correlation to traditional asset classes as well as other hedge-fund strategies, are still highly useful as a diversifier of a total investment portfolio. Further he adds that investors in CTAs should have a medium-to long-term investment horizon and they should not get carried away by short-term performance as it is very hard to predict the performance of the managed futures since they are designed for the medium to longer term.
Founded in 1987, Man AHL, uses statistical analysis to identify pricing inefficiencies in a multitude of financial instruments across asset classes that trade in more than 30 futures exchanges around the world. Man AHL’s trend-following strategy, which is completely systematic and quantitative, seeks to profit from price movements of instruments, regardless of whether the price is rising or falling.
Man AHL’s logarithmic computer system is not likely to go through a big over-haul despite the woeful returns last year, however, its strategies have been fine-tuned of late. According to Della Casa, there are a number of upgrades that they have done, the most prominent one was the streamlining of their execution optimiser – they will time their executions. If they have signals that show them positive signs across the time frames, they would execute the trade; if two signals are contradicting each other such as a negative one from the short-term time –frame and a positive one from the longer-term time frame, they will optimise the entry to the long position
From the past performance over last 20 year, macro and CTAs always performed well in market dislocations and volatility spikes. For MAN AHL, over the past 14 years, it has turned in positive returns every year, except in 2009; and in seven of the past 10 years, it delivered double-digit returns.