An array of quant investing strategies that do particularly well in turbulent times are on track to have their best year since 2000, reports an article in The Wall Street Journal, and they’re hoping the market turmoil will continue to extend their successful run. The quant funds build their bets on growing trends as different assets rise or fall, switching into new positions if the algorithms they’ve set up warn them that a shift is coming. In a year of steep interest rate hikes and high inflation, these strategies have proven to be a safe haven, and the index that tracks them, the SG CTA Index, is up 18% so far this year.
Quant funds, known as “crisis alpha,” generally do well in times of volatility, with managers using various methods to get ahead, such as following market signals of different lengths, trading in diverse futures markets, or utilizing a number of different volatility restrictions. The funds’ algorithms and resulting positions are not usually transparent and “do really, really well in a regime shift [which] seem obvious in hindsight, but [are] hard to manage,” Andrew Beer of Dynamic Beta Investments told The Journal. And indeed, there were several trades that boosted the funds this year, namely the surge in commodities and the decline in global stock and bond prices, as well as the strong dollar. As markets began to stabilize last month, the funds started to lag, with the SG CTA Index dropping 6.3% since the end of the October.
But trend-following funds have been popular with individual investors this year; iMGP DBi Managed Futures Strategy ETF, the fund managed by Beer, started with year off with less than $80 million and now holds over $1 billion. And because the threat of a recession still looms, and the Fed is expected to keep raising rates well into 2023, most adherents believe that the funds will continue to outperform, especially since the funds are designed to pivot their positioning when trends change. However, shifting positions too much and too quickly can be risky, as evidenced in the years following the 2008-09 financial crisis, the article maintains. Because the Fed stamped down volatility so strongly during that time, trends were unable to flourish. The SG CTA Index only gained 18% from 2010-2019, compared to the S&P 500, which more than tripled, and investors pulled their money out of the strategies in droves. And recent research from Universa Investments indicates that the profits made by trend-following funds during downturns isn’t enough “offset their drag on portfolios’ performance” in other areas and that investors are “rolling the dice” by putting money into them, said Dr. Ronald Lagnado, Universa’s director of research.