Stockholm (HedgeNordic) – In a recent interview with Risk.net, David Harding explained the decision to steer his hedge fund firm Winton away from trend following, reducing the weight of systematic trend following in the main fund, the Winton Fund, from 50 percent to approximately 25 percent.
Harding (pictured) has long been outspoken on the efficient market theory and a firm supporter of the idea that this theory of rational markets is a myth. After all, momentum runs counter to the predictions of the efficient market theory. “Everything we’re going is centered on the ways in which efficient market theory isn’t true”, David Harding told Risk.net. It has frequently been speculated that trend-following returns have partly decreased in recent years due to overcrowding in trend-following strategies, but February’s market turmoil was the last nail in the coffin. The February turmoil was “the straw that broke the camel’s back”, Harding told Risk.net, convincing him that the trend-following arena had become “further overcrowded”.
“My estimate of the level of slippage caused by trend followers’ position adjustment after February edged up. And when I say ‘edged’ I mean a 10–20% increase”, added Harding. Trend-following hedge funds usually scale positions based on volatility, which implies they tend to add to their exposure when volatility is low and reduce exposure when volatility resurfaces. Trend-following players also tend to enter crowded trades, so a change of direction in momentum-driven trends can lead to abrupt and significant losses as many traders are heading for the exit at the same time. During the first week of February, the VIX Index, the so-called fear gauge that reflects market expectations for the future volatility in equities, rose steeply from around 13 to 37. “If any trade gets very crowded then it can backfire”, Harding said. “It’s a standard market thing. If everyone tries to do the same thing at the same time, it goes wrong.”
“If any trade gets very crowded then it can backfire.”
The sudden eruption of volatility led to significant losses for most trend-following hedge funds. The Winton Fund, for instance, lost 5 percent in February and Société Générale’s index tracking the performance of trend-following hedge funds posted a loss of 6 percent. Nordic trend-following hedge funds, as measured by the NHX CTA Index, experienced their worst month on record in February after posting a 5.1 percent loss on average.
Winton intends to reduce the weight of trend following in the Winton Fund, a multi-strategy fund with more than $9 billion in assets under management, and other funds overseeing an additional $3.5 billion by around January 2019. Although trend-following returns have diminished, Harding believes firms such as Winton will continue to encounter opportunities going forward. In early June, Winton announced the launch of the Winton Trend Strategy, an active systematic trend-following-only strategy. The new launch makes Winton’s trend-following systems available on a standalone basis for the first time. “It’s a significant commercial move, a significant reorientation of Winton’s resources internally and market positioning,” told Risk.net about the launch.
As for the future of Winton’s trend-following systems, Harding does not see comparative advantage in acting on strong signals, which lead to crowded trades as traders quickly identify those signals. Instead, Winton intends to focus on seeking out weak signals, but a lot more of them. “For weak signals, there’s relatively little time and effort devoted to looking for them by others,” Harding said.
“For weak signals there’s relatively little time and effort devoted to looking for them by others.”
To read the article written by Risk.net titled “Winton’s David Harding on Turning Away From Trend Following”, click here.