overriding caps on long equity and bond exposure into some strategies.
Trend following time frames are also important. Aspect’s spectrum of trading frequency in trend ranges from one to two weeks to two or three months and goes out to six months or more. A balance is helpful as different speeds work better in different asset classes over different periods, as shown on the firm’s extensive performance attribution breakdowns, including performance per speed and per sector.
Aspect maintains a balance amongst asset classes and speeds because they do not have confidence in extrapolating from recent relative trend performance. “There is very little forward-looking information in recent relative performance of markets and timeframes,” says Lueck, who views this as “overfitting”.
Outlook for trend following That philosophy also applies to predicting the opportunity set for the overall strategy. It is widely accepted that 2015-2019 or even 2009- 2019 was a wilderness period for most trend following strategies (at least in traditional if not alternative markets), due to the level of government intervention. “QE, ZIRP and the Fed Put prevented trends from developing. On a longer historical perspective this period can be seen as an aberration, and the recent performance resurgence may have some reversion to the norm. Investors could easily have lost faith in trend following, but we look at the longer-term arc of the strategy,” says Todd.
Aspect never had any doubts about the behavioural drivers of trend following. “Humans have not evolved that much over this period. Common trends are manifested due to investors’ ability to assimilate information, anchoring, and differing diffusion speeds for information. The utility of trend is as valuable as it ever was,” says Lueck.
The new macroeconomic and policy configuration seems benign for the strategy. “Now we have moved from QE to QT and divergence is opening up between central bank policies – with China easing while the US tightens – uncorrelated sources of return are more easily available in a more disparate, idiosyncratic and diversified climate,” says Todd.
“We may even see epic trends of a biblical nature that were seen in the 1970s and 1980s,” ventures
Lueck. Whether CTAs can repeat the returns of those decades is open to debate since the average volatility of programs has somewhat declined. “But we are optimistic for an opportunity set of that order,” he says.
Investment consultants and the investor base Regardless of recent performance, the institutional quality of CTAs has now been recognised by leading investment consultants, who have been helpful in recommending trend following as part of strategic allocations to risk mitigating portfolios. CTA allocations might stand alone or could be part of crisis risk offset or risk mitigating strategies. Some investors and consultants group CTAs as part of a family of strategies, which may include trend following, systematic global macro, discretionary global macro, alternative risk premia, and long only ultra-long duration bonds.
Since inception, Aspect’s main investor focus has been institutional investors, pension funds, insurance companies, endowments and foundations. The main investors are US pension funds, European pension funds, and private wealth managers, who understand the important role CTAs play in portfolios. Some distributors, such as the largest private wealth manager in Australia, do have some retail investors (though Aspect does not deal directly with retail clients).
The investor pipeline is the strongest that Aspect has seen in 5 years, but this may not be manifested in immediate allocations. “After the TMT bubble burst and after the GFC, it took a year or two before investors adjusted and heavily invested into CTAs. After 2008 some investors needed to use CTAs as an ATM. The big inflows came in 2011-2012 as they adjusted their medium- term and long-term allocations,” recalls Todd. Naturally, some investors also need to top slice CTA allocations to maintain target weights after a period when CTAs have considerably outperformed long only equities and bonds, which had their worst double act in decades last year.
Looking forward to the next 25 years, notwithstanding strategy diversification, development and innovation, the concept of trend following still occupies centre stage. Aspect reiterates its confidence in the utility of trend following, and is offering a range of solutions complementing trend following, all of which meet its investment mission of providing liquid sources of returns and diversification. THFJ
19
“There is always something more to learn. And as investor appetites evolve, we refine models to continue offering
utility.” — MARTIN LUECK
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