A successful and thriving research effort is fundamental to Aspect's business – it ensures the continuous evolution of the alpha-generating models which deliver investment returns to our clients. Aspect regularly provides insight and analysis in the Aspect Insight Series. The aim is to provide investors with better transparency on our strategies as well as commentary on market behaviour and topical themes.
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Whenever the managed futures industry experiences a period of muted performance it is natural for investors to reassess the utility of their CTA allocation. We first wrote about the benefits of retaining patience with the strategy during a period of muted performance in May 2013. The intervening four years have provided further data which can be used to re-examine the arguments. In this updated paper, we have added italicised sections which assess the original arguments in the light of new data, to see whether they can be confirmed or refuted.
The managed futures industry has a long history of providing risk-mitigating properties to investors’ portfolios. In this paper, we take a closer look at the characteristics that make managed futures a valuable risk-mitigating, and performance-enhancing, part of a portfolio. We discuss the concept of ‘crisis alpha’: the ability to generate strong performance during traditional crisis periods. Additionally, we show how adding managed futures to a traditional portfolio can lead to improved risk and return characteristics. Finally we demonstrate the well-known ‘managed futures smile’: the ability of managed futures to perform well in both equity bear and equity bull markets.
In this paper, we review the key advantages of the systematic approach to investing. In addition to the avoidance of investment error due to psychological bias, a systematic approach offers several key benefits including: the scalability to invest with a consistent approach twenty four hours per day across a global portfolio of securities; the implementation of consistent risk management at security, asset class and portfolio level; and, the scientific rigor which can be devoted to the continuous development of the core investing approach. We also review academic evidence comparing the performance of systematic and discretionary CTAs and hedge funds.
The ability to simulate the performance of a trading strategy back through time is one of the key benefits of a systematic approach to investing. However, it is vital that it is performed in a scientific and disciplined manner. Simulation allows us to test an investment strategy on a range of markets and market environments. At its best it enables a scientific approach to investment research where hypotheses can be tested and strategies can be designed, with the aim of assessing a given approach to trading the markets. However, building a strategy which shows a profitable simulation is deceptively easy, while building a profitable portfolio is considerably more difficult. There are many potential pitfalls to be aware of when creating a simulation. This paper discusses some of the key challenges in building, understanding and evaluating simulations.
The use of monetary financing (quantitative easing) as part of a broader set of measures that directs lendable funds to a sovereign’s publicly traded debt, at attractive terms, is well understood by economists, and is termed financial repression. In this paper, we examine the behaviour of trend following strategies during financial repression, and we draw clear parallels between the financial repression seen in the post-war economic environment and that seen today.
Investors typically seek to exploit the power of diversification: it is possible to improve risk-adjusted returns simply by combining different diversifying strategies of similar risk and return. In this paper, we ask if this approach should be applied to trend following models. There are many different methods of creating trend following models, and we consider a wide range of common approaches to investigate whether the combination of several of these models can lead to improved performance, or whether there is a better way to construct a trend following system.
This paper re-examines the benefits of an investment in managed futures, and specifically the benefits of trend following, to determine whether they are still valid. Specific factors which may have contributed to the recent difficult performance are investigated, in order to determine whether these factors are likely to be persistent. Other potential concerns about the strategy are also evaluated.
After a period of muted performance from the Managed Futures industry, it’s easy to understand why an investor might be tempted to reassess the utility of their CTA allocation. We present some arguments that reaffirm the utility of Managed Futures in a portfolio context, showing that patience is indeed a virtue. Drawdowns rightly ought to challenge an investor’s beliefs. Armed with supporting evidence, an informed investor can become more comfortable with the drawdown profile of Managed Futures strategies and even learn to use them as an opportunity to increase exposure advantageously.
Over the past 20 years, correlations between assets and across different asset classes have been rising steadily. This represents a challenge for all investment managers and is a concern for investors. For trend following strategies, the issue manifests itself in terms of an increase in the frequency and magnitude of portfolio concentration, which can be an undesirable property. Fortunately, there are a number of techniques which can be used to address the issue of increasing correlations and the significant research effort applied by many actively managed CTAs seems, for now, to have been successful in this regard.
Aspect Capital regularly interacts with academics to assist in research and analysis. When the opportunity arises Aspect is pleased to provide sponsorship and support to work that can provide our clients with further understanding of our industry and the strategies that Aspect offers. Below are examples of academic work that give further background and context to the programmes available at Aspect.
An analysis of CTA risk and return
In this paper, the UCC team looks at the performance of CTAs, breaking down the universe into groups with distinct strategy characteristics. It analyses whether actual CTA performance can be explained by the use of simple alternative beta models or "alternative risk premia": carry, momentum, value and options strategies.
Trend following and financial crises
Mark Hutchinson and John O'Brien, University College Cork, looked into the behaviour of trend following strategies. Their paper focuses on positive returns that can occur during crisis periods for trend following strategies, the market behaviour of CTAs during those periods, and the behaviour after a crisis has ended.
Mark Hutchinson and John O'Brien, University College Cork, use a basic trend following model and look at whether its performance can be related to factors such as the business cycle, stock and bond market performance and a measure of market uncertainty.