Trend-following has seen explosive positive returns in 2019. This has been the best year for performance since 2014 although current increases in global yields are cutting into performance. Many have been surprised by the wide dispersion of returns across managers, but there are some simple and obvious reasons for these differences. The two most relevant reasons are differences in volatility and differences in exposure to bonds.
Look at performance differences based on a standardized volatility. Take any set of managers for comparison and just standard to a desired volatility level. The wide dispersion across managers in 2019 does not look so great after the adjustment. In fact, the level of dispersion for a high return year like 2019 does not look much different than 2018.
The large CTAs have a bias toward financial futures which have served them well. The managers who allow for less volatility equalization have done better. Those managers that have constrained bond exposure have shown more modest performance.
Adjusting for volatility and accounting for market exposure will go a long way for explaining differences in performance.
Look at performance differences based on a standardized volatility. Take any set of managers for comparison and just standard to a desired volatility level. The wide dispersion across managers in 2019 does not look so great after the adjustment. In fact, the level of dispersion for a high return year like 2019 does not look much different than 2018.
The large CTAs have a bias toward financial futures which have served them well. The managers who allow for less volatility equalization have done better. Those managers that have constrained bond exposure have shown more modest performance.
Adjusting for volatility and accounting for market exposure will go a long way for explaining differences in performance.
