Stockholm (HedgeNordic) – After a period of strong equity returns throughout most of 2024, trend-following CTAs were heavily long equities ahead of the sell-offs last Friday and Monday this week. HedgeNordic reached out to several Nordic trend-followers to understand their positioning ahead of the sell-off and evaluate whether CTAs can offer “crisis-alpha” during short-lived corrections. The returns for Nordic CTAs in the first days of August varied significantly, ranging from a positive 1.2 percent month-to-date through the end of Monday, August 5th, to a negative 15.9 percent over the same period.

The team at CTA specialist RPM analyzed the recent market environment in two stages: the period from July 17 to July 26, and the sell-off from August 1 to August 5. According to Per Ivarsson, Head of Investment Management at RPM, CTAs were naturally long on equities after a period of strong returns and had established long bond positions already in early June to benefit from a decrease in interest rates. 

“In the first stage of the equity sell-off (July 17th to July 26th), CTAs suffered from this long equity position and exposure to some other risk-on sectors,” explains Ivarsson. “In the second stage, CTAs again suffered from the long equity position but enjoyed strong returns from the long bonds positioning and from being long VIX, which spiked to levels not seen for years.” Ivarsson notes that CTAs had negative returns during this period but fared better during the second leg down due to changes in positioning.

“In the second stage, CTAs again suffered from the long equity position but enjoyed strong returns from the long bonds positioning and from being long VIX, which spiked to levels not seen for years.”

Per Ivarsson, Head of Investment Management at RPM.

Mandatum Asset Management’s trend-following managed futures strategy was also long bonds and equities ahead the recent sell-off. “Before the recent sell-off, our portfolio was positioned long in both bonds and equities, capitalizing on the continued positive trends in these asset classes,” states Ville Rantanen, Portfolio Manager for Mandatum Managed Futures Fund. The fund also maintained minimal currency exposure and a small short position in volatility, expecting volatility to remain low. While most traditional trend-following strategies were caught off guard by the trend reversals, Mandatum Managed Futures Fund gained 0.5 percent on Friday and 1.5 percent on Monday after exiting its previous positions.

“Before the recent sell-off, our portfolio was positioned long in both bonds and equities, capitalizing on the continued positive trends in these asset classes.”

Ville Rantanen, Portfolio Manager for Mandatum Managed Futures Fund.

“A key element of our strategy is the integration of meta-models, which are designed to override traditional trend models during periods when there is an increased probability of strong adverse price moves,” explains Rantanen. “These meta-models activate infrequently but have proven highly effective in recent conditions,” he emphasizes. On the morning of the sell-off on Friday, August 2nd, Mandatum’s managed futures strategy exited long equity positions and initiated a mild short position in equities. Simultaneously, volatility futures were added into the portfolio, which generated positive returns for the fund, according to Rantanen. “Additionally, our long bond positions generated gains, and our reduced short position in yen resulted in minimal adverse impact.”

Crisis Alpha Properties in Short Time Periods

Trend-following strategies tend to provide “crisis alpha” during market crises. However, over short periods such as a few days or a week, trend-following may not have enough time to adapt, diminishing their ‘crisis alpha’ properties. “Due to the inherent properties of the core CTA strategies (i.e. trend-following), they will almost certainly suffer in the early days of an equity correction that comes after a period of strong equity returns,” notes Per Ivarsson of RPM. “In our experience, after a period of 5-15 days, if the equity correction continues, CTAs will reduce the equity positioning, and more importantly, pick up on trends in other markets that develop in the wake of the equity sell-off,” he adds.

“Few investors expect explicit protection in scenarios like this. Most investors allocate to trend-following with a longer-term downturn in mind.”

Gustaf Eriksson, Head of Business Development at Lynx Asset Management.

Gustaf Eriksson, Head of Business Development at Lynx Asset Management, concurs, stating that “few investors expect explicit protection in scenarios like this.” According to Eriksson, “most investors allocate to trend-following with a longer-term downturn in mind.” He further notes that “long-volatility or fixed-income managers are more commonly expected to provide positive P&L in such contexts.” Ville Rantanen of Mandatum Asset Management argues that “CTAs generally have the potential to deliver crisis alpha, although rapid market shocks present significant challenges.” However, the team overseeing Mandatum’s managed futures strategy “put a lot of effort into improving our ability to manage fast shocks.”