- Advertisement -
- Advertisement -

Related

History Shows What to Expect from Trend-Following When Rates Are Being Cut

Industry Report

- Advertisement -

By Man Group: Having reached an inflection point in the rates cycle, investors may be wondering what to expect from trend-following strategies. Towards the end of 2023, the ‘higher-for-longer’ narrative evaporated as inflation moderated. The Federal Reserve’s (Fed) dovish pivot in December signalled not only the end of one of the most aggressive rate hiking cycles in modern history, but also that rate cuts were firmly on the roster for 2024, with the Fed dot-plot pricing in 75bp of cuts over the course of the year.1

We do not have to go back far to see how trend-following performs during rate hiking cycles. 2022’s blockbuster performance2 was a prominent example, with the Barclay BTOP50 Index (BTOP50)3 returning 15%. But as we now stand at an important inflection point, investors may be wondering how trend-following performs during rate cutting cycles.

To help answer this, we compare the performance of the BTOP50 since its inception in 1987 against the Federal Funds Target Rate (FFTR), denoted by the grey shaded area in Figure 1. The performance of the BTOP50 is then plotted relative to two distinct environments: firstly, when the FFTR is rising (yellow line in Figure 1) and secondly, when the FFTR is being cut (light blue line in Figure 1).

Whether a period is classified as a hiking cycle or a cutting cycle is determined by the 12-month forward level of the FFTR. If this is greater or equal to 75bp, it is classified as the former and if it is less than or equal to -75bp, it is classified as the latter. The rationale for choosing this classification is twofold; firstly, it aligns with the Fed’s latest dot-plot, which forecasts 75bp worth of cuts over 2024, and secondly, it accounts for the fact that interest rates lag inflation, so goes some way towards capturing the forward-looking nature of monetary policy, as well as the movements in asset prices that are driven by a change in expectations. For completeness, we also plot the returns corresponding to the periods where the FFTR is largely static (dark blue line in Figure 1). Performance is then held constant when the environment switches.

Figure 1. Performance of BTOP50 in rising (yellow), falling (light blue) and static (dark blue) rate environments

Source: Man Group database, Bloomberg, BTOP50 Index © 2024 by Backstop Solutions Group, LLC – BarclayHedge (“BarclayHedge”). Data as at 31 December 2023.

The first observation we can make from Figure 1 is that trend-following performance is positive during the majority of hiking cycles classified over the period, with an annualised return for the BTOP50 of 8%. 2022 helps validate this observation as trend-following profited from sizeable trends in fixed income markets and the US dollar, which were precipitated by the Fed’s unprecedented hiking cycle, to the tune of 425bp.

The second, and more pertinent observation given the current environment, is that trend-following performance has been positive during each cutting cycle since the 1980s, with the BTOP50 annualising 9%. Indeed, it can be observed that the relationship is more pronounced during cutting cycles than over hiking cycles.

Finally, over periods where rates are relatively static, we find that the annualised performance of the BTOP50 is 5%, underperforming the BTOP50 during both cutting and hiking cycles.

Conclusion

The above analysis provides a historical view of trend-following performance, which could apply to future rate cutting cycles. It is analogous to the analysis undertaken by Neville4 which examines around a century of data to show that trend-following is not only a robust performer during inflationary periods in general, but also in the six-and 12-month timeframes following inflation’s peak.

The article was originally published here.

With contributions from Rupert Goodall, Client Portfolio Management Analyst, at Man AHL.

1. Source: Federal Reserve triggers market rally as it signals interest rate cuts in 2024 (ft.com).
2. Source: 2022: The Year of Traditional Trend-Followers – HedgeNordic.
3. The BTOP50 Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. The BTOP50 employs a top-down approach in selecting its constituents. The largest investable trading advisor programs, as measured by assets under management, are selected for inclusion in the BTOP50. In each calendar year the selected trading advisors represent, in aggregate, no less than 50% of the investable assets of the Barclay CTA Universe.
4. Neville, H., “The Road Ahead: Inflation Can Go Down as Well as Up”, May 2022. www.man.com/maninstitute/road-ahead-inflation-up-down

Subscribe to HedgeBrev, HedgeNordic’s weekly newsletter, and never miss the latest news!

Our newsletter is sent once a week, every Friday.

Man Group
Man Grouphttp://www.man.com
Man Group is a global, technology-empowered active investment management firm focused on delivering alpha and portfolio solutions for clients. Headquartered in London, we manage $151.7 billion* and operate across multiple offices globally. *As at 30 June 2023.

Latest Articles

Rising Adoption of Quantitative Investment Strategies Among Nordic Investors

From a high-level perspective, there is a clear trend of increasing adoption of quantitative investment strategies (QIS) among Nordic institutional investors, either through the...

EU Plans Stress Test for Hedge Funds and Non-Bank Firms

European regulators are planning a stress test to identify vulnerabilities beyond the traditional banking sector, focusing on less regulated entities such as hedge funds,...

ALCUR Fonder Continues Hiring Spree

Following two earlier additions this year, ALCUR Fonder continues to expand its portfolio management team at a notable pace. The Stockholm-based hedge fund boutique...

Nordic Private Markets Modernize with Data-Centric Trade Lifecycle Automation

By Anders Stengaard Jensen at Indus Valley Partner: In recent years, asset managers in Nordic countries have accelerated efforts to modernize trade operations, particularly...

Norwegian Hedge Fund Industry Sees Major Boost with New Launch

The Swedish and Danish hedge fund industries remain closely matched in size, with Denmark recently edging ahead of Sweden. While still less than half...

Atlant Funds Hold Up in May Despite Mistimed Market Call

Macroeconomic and market forecasts are notoriously difficult, even for experienced hedge fund managers. What matters more than being right, however, is ensuring that incorrect...

Allocator Interviews

In-Depth: High Yield

Voices

Request for Proposal

- Advertisement -
HedgeNordic
Privacy Overview

This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.