RESEAR CH
Fig.5 S&P 500 Index (Crisis periods depicted in red) 2000
1500
1000
500 Jan 02 1990 Jan 04 1993 Jan 02 1996 Jan 04 1999Jan 02 2002 Jan 03 2005 Jan 02 2006 Jan 03 2011 Jan 02 2014
Table 2 Sector
Commodity Currency Equity Interest Rate
Less trend in crisis
54.41% 91.89% 69.32% 98.29%
level of trend in markets (e.g., downward trend in the case of the equity markets). If CTAs can exploit the persistence of such trends in a crisis, they stand to benefit from prolonged downturns.
Returning to the S&P 500, we may be able to gain insight into the source of crisis alpha by examining how the aggregate level of trend, measured by average SNR, changes during crises. Applying a Welch Two Sample T-test comparing crisis aggregate SNR values to observations from the rest of the sample (1990 onwards), we find that we may reject the null hypothesis that the two samples have equal mean in favor of the alternative that crisis SNR is greater at the 5% significance level (p-value = 0.042, t=1.79).
We may apply the same test at the sector level to see if a subset of futures markets are trendier during these periods. See Table 2.
Contrary to the assumption that successfully exploited equity market trends are the source of crisis alpha from CTAs, equity trends as measured
18
Greater trend in crisis
45.59% 8.11% 30.68% 1.71%
by SNR do not appear to differ at the 10% significance level.
However, interest rate trends, and to a lesser extent currency trends, deviate from their non-crisis levels. This may be because equity downturns are preceded by persisting trends in these other sectors that are followed accurately. While the understanding of the source of CTAs’ crisis alpha remains incomplete, SNR provides some insight into market behavior during these events.
Conclusion • Fourth quarter historically has been more favorable for trend following managed futures programs in comparison to the first 3 quarters. Commodities appear to have the strongest trends in the fourth quarter.
• In periods of stress in the stock markets the trend followers have provided crisis alpha. The trendiness as defined by signal to noise ratio in these conditions appears to be strongest in interest rates and currencies. THFJ
“Because this market trend index is a measure of how 'trendy' futures prices are, we expect it to correlate with CTA trend follower performance over comparable time frames.”
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