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Digital Subscriptions > The Hedge Fund Journal > Issue 128 – Nov | Dec 2017 > Man AHL Marks 30 Years

Man AHL Marks 30 Years

‘Crisis alpha’ expected to survive bond bear markets

PROFILE

European CTA pioneer, Man AHL, turned 30 this year. Over this period, managed futures – and Man AHL strategies – have generated better riskadjusted returns than world equities, and with smaller drawdowns. In particular, managed futures have sometimes produced substantial positive returns, during crisis periods when equities crashed. The TMT bubble bursting between 2000 and 2003, the Russia/ LTCM crisis in 1998, the credit crisis in 2008, the European sovereign debt crisis in 2011, are all good examples of how CTAs zigged when equities zagged.

There are sound reasons to think that trend-following alpha could be persistent and sustainable, over the long run. Man AHL’s Head of Client Portfolio Management, Graham Robertson, enumerates “behavioural finance teaches us that humans fall prey to biases, such as selling winners too early. Slow dissemination of, and under-reaction to, new information means it can take weeks or months to percolate into markets. And long-term macro cycles – both in terms of monetary policy and business cycles – move very slowly, again over multi-year periods.”

Man AHL’s 30-year life has coincided with a very persistent bull market in bonds, which most trend followers, including Man AHL strategies, have profited from, including when bonds rallied during market panics. Future market routs could of course see bonds and equities fall simultaneously. And Man Group has confidence in their potential to generate ‘crisis alpha’ from bonds as well as equities. In a September 2016 research paper entitled ‘Trend Following: Equity and Bond Crisis Alpha’, by Carl Hamill, Sandy Rattray and Otto van Hemert, Man Group demonstrates that momentum strategies would have performed strongly in the bond bear market between 1960 and the mid-1980s, when the US Ten Year yield rose from 5% to nearly 16%, and bonds returned less than the risk-free rate, as well as during the bond bull market since 1985. (As bond futures did not exist for much of the earlier period, Man AHL synthetically modelled proxies based on ‘cash returns, financed at the local short-term rate’). The hypothetical momentum strategy returns do vary according to the lookback period chosen to define trends. But it is widely known that medium-term trend followers use a one to four-month period (and in the paper, Man Group statistically infers that this time frame is the best fit for the BTOP50 index). Using this lookback period, annualised returns in excess of cash were in midsingle digits, and the strategy generated Sharpe ratio of 1.3, gross of fees and costs, over the whole period. The return profile also maintains the CTA hallmark of being a positively skewed one, akin to the payoff profile from buying a straddle, or both call options and put options. The associated ‘smile’ function shows that CTAs have done best in times of extremes – when equities or bonds were in their highest or lowest quintiles of performance. Notably, performance was best when equities or bonds were in their lowest quintile. As markets tend to fall faster than they rise, this is not surprising.

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