Managed futures as an asset class has been battered by the markets and by central bank uncertainty in recent years, according to Wadhwani Asset Management’s CEO, Sushil Wadhwani.
The sector specialist, and formerly Citywire AA-rated manager, is fighting the storm with the fund he manages on behalf of GAM, the GAM Star Keynes Quantitative Strategies fund.
Over the last three years to the end of July 2017, the fund lost 5.96% in euro terms, while the average manager lost just 1.88%.
Wadhwani said outperformance has been hard to achieve in such a difficult time for the sector.
'Our non-trend strategies have done their job, helping to offset the poor performance from trend following in recent years. Although trend strategies performed well in 2014, they have struggled since.
'Looking at the same period non-trend has done a little bit better but I wouldn’t be shouting from the rooftops about that. It’s just done a little bit better on the margin which helps us, but it has been a very difficult period. We need another year like 2014.’
Over the past year to the end of July, the strategy lost 5.65%, with the average manager in the managed futures sector bringing in 1.74%, Wadhwani said the non-trend element which has helped his fund grow in the long term.
'On average non-trend helps, it obviously doesn’t help every month or every quarter, but on average it has helped. All of the strategies have been to some extent, been affected.
‘After the financial crisis, the central banks became more risk-averse. Every time the economy has dipped or financial markets have trouble they have tended to come to the rescue.
'The result is that there haven’t been big trends and historically trend-following strategies have made quite a lot of their big money from events caused by financial distress.'
According to Wadhwani, each time the financial destruction has been fixed by the central bank, trend following has struggled.
'Trend-following strategies tend to make money during recessions. At the moment there is only a small portion of the world economy that is in recession, and with the wider macro picture, it looks as though trend following might not do very well.'
Clearly market moves could change and Wadhwani said his team believes it will switch swiftly as the focus of central banks begins to shift.
'Central banks are now focused on the fact that economies are close to full employment and therefore are beginning to worry a bit more about inflation. As a result of that, I think they will be less likely to ride to the rescue.
'If this happens trend following strategies will start to do a little bit better and a continued normalisation of interest rates will benefit trend following.
'Likewise, if you get a recession, trend following will also do well, but if there is more of the same of what we currently have, then trend following will continue to remain tricky.'
How to outperform
Many managers in the managed futures space have struggled to perform, but Wadhwani said the team's models has helped keep them on an even keel.
‘Our non-trend indicator is something that has helped, as we use sentiment and value. The reason something like sentiment helps is because if you have a situation like the panic in China in 2016 with world equities, where trend following made a lot of money, then the Fed made it known that they were not going to tighten.
‘They came to the rescue again, as they came to the rescue markets rebounded and trend following gave up all its gains. The sentiment models made money when everyone was gloomy, the sentiment models bought some energy, bought some equities and these things all rebounded nicely.’
At the beginning of the year, Wadhwani said the market was very optimistic, as many thought there would be a big fiscal stimulus in the US with a new president meaning value would go up.
'Our value models were very cautious, they were actually short the US dollar and then people got disappointed. The fiscal stimulus didn’t appear, as the dollar went down and our value models made money where our trend models lost it.'
'At the beginning of the year our trend models were long the US dollar and our value models were short. Still, if you were just running trend models then you would have lost money, but value models paid for the losses of the trend models, which gave us a big advantage.'
As of the end of September 2017, the trend element had lost 1.57% whereas non trend has made 3.81%. In terms of contributions, the event-based system’s contributions to the fund over the year to the end of September came in at 1.28%
From July 2016-September 2017, taking into account trend and non-trend, equities made 10.17%, fixed income lost 6.92% and currencies also lost 1.92%.