There is a popular meme going around that shows an intoxicated Captain Haddock downing a stiff drink, complaining about having bad a rough week. Tintin smartly corrects him that it’s only Wednesday.

For Managed Futures managers, we can only imagine is how this week felt, especially so after having a rough day on Friday the 10th, when Silicon Valley Bank was halted. SVB was ultimately taken over by the FDIC over the prior weekend.

A lot of the goodwill that Trend Followers built throughout 2022 will likely have been undone. Janet Jackson’s song, “what have you done for me lately” sadly also applies to Trend Followers. No matter how strategic and long-term your client is.

The Bond trend was a nice case of how a trend follower strategy typically walks up the stairs and finally jumps out of the window as the trend change. Or as in this case, figuratively being defenestrated by the collective force of risk managers, traders, and asset allocators striving to reduce duration, credit mismatches, and losing trades in their books. A week where a triple witching coincided with a banking crisis.

While the end of the prior week was not stellar, this week represents a major turn of fortune for trend followers. The market changed from pricing in a FED that might eventually stop increasing policy rates, to pricing in a major banking crisis. The pricing is now offering substantial odds that the FED may actually decrease rates throughout 2023. An implicit macro view held by the average trend followers was the “inflation is transitory for longer” theme.

CTAs, as measured by the NilssonHedge Daily CTA index, lost 3.5% on Monday as bonds rallied. Tuesday offered a small relief and perhaps a good point to liquidate short-duration positions into weakness and the index recorded a gain of 0.9%.

Unfortunately for Trend Followers, the bond rally continued on Wednesday. At this point, a lot of CTAs had reduced fixed income positions by approximately half, in wake of the trend changes and increased volatility. Wednesday resulted in a loss of 1.8%.

Thursday offered a modest relief (+0.5%), but the appetite for government securities continued on Friday. This time, the loss was more normal with a loss of 80bps. This was a near-perfect combination of punches with the two first being the strongest. Here we note that our index is not a pure Trend Index, but also contains managers using other strategies.

Largely explaining the results for the week is the rally in the US 10y futures, which moved approximately 5 handles (from 110 to 115) from Friday the prior week to Friday this week.

What is pleasing to see is that the sensitivity that CTAs have to bond moves have been rapidly reduced (both position and risk-driven reductions), the moves were so significant that CTA suffered one of their absolutely worst daily losses (not the worst, but close), 2-day losses, etc. While CTAs did not trigger the bond rally, they and countless other entities added fuel to the fire as they needed to close out existing shorts.

Not only did the benchmark bonds increase significantly in price, but also the shorter duration instrument (Eurodollar and the SOFR futures) had extraordinarily steep price changes. This also contributed significantly to the negative week.

On the back of this, at least one Global Macro with significant pedigree has closed. Graticule, a Singapore-based fund, closed shop after having taken wrong-way bets in short rates. Given how markets have been trading there may be more fund closures.

As the SVB and FRB (First Republic Bank) crisis morphed into the international area and threatened banks with larger balance sheets (CS…) the quickly evolving banking crisis is still ongoing. Despite various interventions over the last week regulators have yet to install the necessary confidence into markets.

Our Daily CTA Index is now close to the maximum drawdown. The speed of the move is similar to the COVID-related March 2020 drawdown that we saw. You will see a similar picture for other daily CTA indices.

A number of lessons will probably be learned from this. Here are a few discussion points that may or may not be trivial:

• Market diversification matters: We have seen the largest losses suffered by managers with concentrated positions in Short Rates.
• Risk Management – volatility-driven position reductions when market volatility increases is a risk management component occasionally frowned upon by some managers.
• Rebalancing frequency: some CTAs rebalance continuously, while other rejig their portfolios weekly or even monthly. The unusual rapid market moves will refocus attention on this.
• Long-Term Trend Following as a crisis alpha – perception matters and most investors that have been sold managed futures as crisis protection will be dissatisfied. CTAs came into this crisis short bonds (and long equity) and failed to provide protection against the start of the Banking Crisis 2.0. Equities held up fairly well during the week but sold off in the prior weeks.
• Short-term strategies may naively offer better crisis alpha during rapid changes. If the crisis continues, long-term trend followers will eventually adjust their position. If the crisis is magically resolved over the next few weeks and we go back to business as usual, trend managers may be in for another whipsaw.
• Short Duration and Trend Following – 2022 was one of the few years when short-duration bets paid off for trend followers. An interesting question is how much of that profits were given back in the recent rally and how your systems should be constructed to capture trends/outliers while not being subject to large givebacks when trading against the wind (carry). And how it’s compatible with providing equity market stress protection. While equity stress protection is not a stated goal for many managers, it is often the precise reason why long-term trend followers have a substantial allocation from institutional investors.

As usual, these market moves as this will probably not repeat in the future but will result in a number of manager reviews, and potential reassessment of the strategy, followed by flows in and out of managers as the dust settles. Buckle up and put on your best suit for the upcoming reviews

If there is any silver lining to this debacle, it is that since 2019, Managed Futures is still (barely) outperforming other liquid alternative strategies. The setback is painful and Trend Following has again shown that it is a pain arbitrage. It is a difficult partner, sometimes loving and caring, but occasionally also violently abusive.

If you have come this far, you can explore our index data for further insights:

Index Data

As we are about to publish we learn that UBS has acquired CS. The terms of the deal are beyond our comprehension to fully analyze. But let’s hope that this is a light at the end of the rather short tunnel, and not another train (analog Bear Sterns followed by Lehman).

No Trend Following is not dead, but it is going to take some time to re-establish positions and recover the losses.

As per usual, our databases are updated and available to subscribers.

Over the weekend, the ultimate fate of SVB (Silicon Valley Bank) will be determined. The FDIC has taken control of the bank and is working through the liquidation process to preserve as much capital as possible. A number of (former) Libertarians and free-market Hedge Fund managers have asked for a Government bailout of SVB.

Friday was a bad day for most Hedge Fund strategies. CTAs suffered as Bond Futures rallied sharply. Prior to Friday, CTAs were generally short duration and the rally caused large losses. What looked like a good start to the year, is now back to a more mundane year for most managers. However, the angst and market action were centered around the de-pegging of the USDC.

In this short update, mostly to sort through our own thoughts, we present the share price of SVB, and the impact on the US Dollar Coin (“USDC”), a common stablecoin. And finally, we estimate the impact on “Hodlers” as some of the strategies that we track had substantial exposure to the USDC.

SVB (was) is a large bank and regulators are currently working through the situation. The exact financial impact is still unsure. The expectations for widespread contagion are somewhat limited. There may be a permanent impact on “regional US” banks as they may face higher regulatory pressure in the future.

In the end, as many pundits have pointed out, the implosion of SVB stems from a mismanaged duration and interest rate risk. SVB was likely almost unhedged with regard to interest rates.

The largest impact is likely on a number of startups and Venture Capitals. SVB had a large share of smaller emerging ventures as clients. The recent repricing of the tech/startup sector had a negative impact on SVB’s balance sheet. Together with a fall in bond prices and “hold-to-maturity” accounting this caused stress on the balance sheet of SVB. Ultimately leading to the demise of the bank.

In the Crypto space, there is a potential for collateral damage as the USDC that had exposure to SVB of $3.3bn or approximately 8%. The Coin broke the Peg on Friday and has been trading in a volatile manner. As the value of the SVB deposits is not likely zero, but rather valued slightly above 50 cents or more on the dollar the impact will be less.

USDC could be a potential way of trading any claims on SVB deposits. Cash timing is somewhat uncertain here though. There was an argument that USDC could result in a bank run as there was an understanding that any USDC would be convertible at par to regular USD.

Circle has promised to resume normal conversion on Monday but presumably, that requires a resolution of any advanced dividends from the deposits that they had. USDC offered relatively high transparency and was quick to disclose its exposure. It is unclear if USDC will offer conversion at par.

During Friday, the USDC traded at highly distressed levels, but the coins recovered considerably as the initial panic subsided. What is nice about Crypto Markets is that they are open 24/7 offering a real-time assessment of risk aversion.

One of our proprietary data sets has access to Crypto Positions for a large share of the managers that we track. We noted a substantial reduction in the number of USDC held (that was the most popular stablecoin), in favor of Tether (USDT). We note that USDT offers less transparency than USDC but the platform where we source our data only offers a few stablecoins.

The move out of USDC to Tether likely caused a permanent loss for many strategies. In 2022, the concept of impermanent loss was widely adopted across the DeFi crowd. In the wake of Luna, we now see somewhat better risk behavior, but the selling pressure presumably contributed to the de-pegging of the USDC.

In the end, Crypto Strategies, while having ~20% exposure to USDC suffered a minor impact. We estimate that this was less than 1% on Friday/Saturday as most other Coins kept up well.

In the end, we do not expect this to be an event similar to the LUNA coin. Depending on regulatory action, the markets may return to more stability on Monday. Ironically, CTAs seems to have been the main victim.

As per usual, our databases are updated and available to subscribers.

As we only have two trading days left in February, we thought providing our readers with a performance preview of the expected results would be helpful. Much can obviously change in the final 48 hours so any observation here is preliminary. Using our daily indices, we comment on the expected February hedge fund results.

In a month where the equity market lost traction, CTA shows its diversification worth by providing modest portfolio protection and positive returns.

Our latest estimate is that a diversified portfolio of Managed Futures managers is up around 1.5%. L/S equity gave up returns in line with equity markets. Event Driven and Market Neutral strategies seem to have fared better and will probably have positive returns for February 23.

Directional Crypto Managers had a strong revival in January, but the result is likely to be more modest this month. With two days to go, Crypto Strategies are positive. The result is only +2% which is not even a significant move for directional Crypto positions.

Trend Followers have likely kept on reducing positions in Equities and Bonds (but likely still short or neutral in these market sectors), and partly establishing new short USD positions. This seems to have worked throughout February and CTAs are likely to have recovered the initial January drawdown. To get a glimpse of estimates of market sensitivities we have developed a page that is showing short-term correlation and beta estimates.

Since the inception of our Daily Indices, which has indeed been a very special period in Global Markets. CTA has better than other strategies. Equity L/S has lagged in equity markets but preserved capital as of late. Even Driven suffered from a lack of deal flows in 2022 (but also a lack of equity risk premia). As the Risk-Free rate increased the premiums available in the market have gotten larger. Market Neutral / Quant Equity is continuing to claw back the Value related drawdown that almost took out the strategy up until early 2021.

In Crypto Markets, the demise of FTX seems to have reduced volatility substantially. In itself an interesting observation. At this stage, we are not sure how to interpret it.

Our daily indices are freely available for download and the intereted analyst can dig into them.

Using our extensive database, we have ranked close to 2,000 reporting hedge funds. From the best to the worst result in January. As noted by other market commentators, January was difficult for Trend Followers but was generally suitable for most other strategies, including the non-Trend CTAs. Most Hedge Fund strategies delivered positive performance.

Asset Allocation/Risk Parity did the best as long-only assets performed strongly. This also helped Equity L/S and Fixed Income strategies that have a persistent beta. On the flip side, we saw flat performance for Market Neutral and a small, unnoteworthy, gain for CTAs. Cryptos did really well as Technology assets rallied strongly.

CTA

A large share of the worst managers, on a performance basis, for January 2023 are the managers that did really well in 2022. Gravity is a mighty foe and the trend is your friend until it bends. Natural Gas traders continued to be fueled by rapid weather changes, and short volatility strategies continued to recover. To see the full CTA list, with dynamic rankings, please see Link

Market Neutral

Market Neutral is one of the least volatile strategies, where returns tend to accumulate over time, rather than printing lumpy returns on the upside or downside. Factor performance tends to dominate the average performance, but specific funds can be exposed to particular strategies that are not captured by academic factors. To explore our Market Neutral database, with dynamic rankings, please see Link

Equity Long/Short

Long/Short Equity strategies had a good start to the year. In particular technology-focused managers with a beta tilt did really well. This is a strategy that is highly expected to do well when the equity beta is positive. To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

As one of the strategies is dependent on equity risk premia but has a low beta to equity markets Event Driven has struggled in the last few years. Several aggressive, highly volatile managers did well, partly based on long positions in selected securities. To explore our Event-Driven list, with dynamic rankings, please see Link

Fixed Income

Like Equity Long/Short managers, Fixed Income managers are usually driven by the underlying market conditions. For this list, we typically find managers that are sensitive to a specific subsector, and especially managers that are engaged in the lowest part of the capital structure. To explore Fixed Income managers, with dynamic rankings, please see Link

Risk Premia

In a strong month for Equity markets, we noted strong results from managers that load on ERP (Equity Risk Premia) or VRP (Volatility Risk Premia). Several of the strongest result for Risk Premia managers related to those strategies. To explore the Risk Premia managers in the database, with dynamic rankings, please see Link.

Crypto

Patience paid off for a large set of Crypto Managers and HODLers was rewarded with outsized returns. To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link.

Past performance is not indicative of future results. This email is intended for sophisticated investors.

NilssonHedge asked OpenAI to write a short success story for one of our many users. It turned out to be pretty ok. We do apologize in advance for the somewhat chatty nature of this post.

The databases are updated and available for download.

Once upon a time, in a city of finance and business, there was a young man named Jack who was trying to make it big in the world of investing. He had a natural talent for numbers and was always looking for new ways to maximize his returns.

One day, while searching for information on the latest hedge fund trends, Jack stumbled upon NilssonHedge, a database that collected returns and other important information on various hedge funds. He was fascinated by the wealth of available information and quickly became a frequent visitor to the site.

As he delved deeper into the data, Jack realized that there were patterns and trends emerging. He could identify which hedge funds were performing the best and which were struggling. He also discovered that the funds with the highest returns often had certain characteristics in common, such as a focus on trend strategies.

Excited by this new knowledge, Jack decided to start his own fund of hedge funds, and he used NilssonHedge as a valuable resource in building and managing his portfolio. He was able to make informed decisions based on the information he had access to and his fund quickly became one of the top performers in the market.

Word of Jack’s success spread quickly, and soon, other investors and fund managers were seeking out NilssonHedge to help guide their investment decisions. The database became the go-to resource for anyone looking to stay ahead of the curve in the hedge fund industry.

And so, NilssonHedge went from being a small and relatively unknown database to one of the most trusted and respected sources of information in the world of finance. Jack’s success was a testament to the power of data and the impact that NilssonHedge had on the industry.

From that day forward, NilssonHedge remained the standard by which all other hedge fund databases were judged, and its influence continued to grow and shape the world of finance for years to come.

We have been working behind the scenes the last few weeks and have created additional refinements when it comes to diving deeper into benchmarking exercises. We have created the following indices:

• Momentum/Trend index,
• Short-Term Trader Composite,
• Quant Index (which here is defined as non-trend),
• a Systematic and Discretionary sub-index subsetting our popular Commodity Index
• a Global Macro Index focused on discretionary “go-anywhere” traders.

While a lot of the indices are correlated (e.g. CTA Momentum and the Systematic CTA index), the drifts will be slightly different and may be useful for benchmarking style pure managers or understanding specific parts of the market structure.

We are touching up the final classification of the underlying managers and may revise the constituents list in the next few days.

We are also working on adding a “Volatility Arbitrage” index which should be ready in a few weeks.

The Quant Index has been defined as managers that are engaged in primarily non-trend strategies (AI, Fundamental, Short Term, etc.) and has generally delivered an interesting risk profile. The Discretionary Commodity index is the least correlated to the broader CTA Indices with a correlation of 0.2.

In particular, for investors looking for diversification, the CTA Quant Index has a relatively low correlation to the general CTA index of 0.67. Momentum on the other hand is 0.95 correlated to our broader CTA index.

In other news, we have distributed the first 2023 version of the NilssonHedge database and given the risk-on nature of the month, traditional alternative strategies did really well. Crypto Managers generated a whopping 32% highlighting their Cathie Wood / ARK correlation.

• We start the year with some 1,267 strategies with data, representing 67% of the strategies in the database.
• On the CTA side, consisting of a large share of private vehicles 222 managers have reported numbers as of “pixel-time”.

If you are interested to explore the structure of our new indices, please head over to our shop and subscribe to the free index data.

Index Data

During the last few weeks, we have been engaged in a number of housekeeping issues. One of them is our index reconstitution. We will be launching several new CTA indices that give additional details for specific sectors.

Every year we reconstitute our indices, a largely automated process, but which involves a fair amount of discretionary oversight to ensure that our indices are representative and relevant. This year, we have some 2900 different strategies in our various composites. Not all managers fit nicely into one composite.

The indices are disseminated through our database, website, partners, and the analytical software packages that NilssonHedge has partnered up with. These indices are generally not proper benchmarks from a regulatory perspective but rather performance indicators.

As a small notice, these indices are not designed to be investable and represent the average return from managers which requires continuous rebalancing. Index figures are updated continuously throughout the month and reflect the current state of the database.

Except for carveouts, there will be no backtracking of the indices. In cases when a new index is launched, it will be based on the historical, actual state of the database as of the launch date. Carveouts (i.e. a separate benchmark based on an existing index; CTA Systematic or CTA Discretionary managers are two examples).

Return data will be continuously updated and will incorporate lagging managers who for various reasons have decided to restart reporting. This may introduce variability in the historical rate of returns.

Remember that NilssonHedge calculates strategy composites based on available data and our individual return stream may not perfectly match the managers’ official track records. We seek to give researchers and allocators a better view of the average investor experience, rather than the asset-weighted investor experience that would be the typical outcome from traditional track records. This may cause minor deviations for particular managers.

Constituents

Every index starts with the index members. Members are selected based on the semi-systematic framework, based on the NilssonHedge classification framework. Below we describe the algorithm for selecting strategies that will form part of an index.

Our methodology for selecting constituents is straightforward and based on the following rules:

• At the end of January, each year, NilssonHedge isolates the managers and strategies that have reported returns for December, in the prior year. In this case, we need data for December 2022 at the end of this month (January 2023). We put emphasis on timely reporting and disclosure of results.
• This list remains fixed throughout the year, regardless of the number of new managers in the database. As such, expect the number of managers to gradually decline throughout the year.
  • Given the indices are calculated based on the average, the index is rebalancing toward reporting managers on a monthly basis.
• There are currently no requirements on assets under management, length of track record, or other qualitative aspects of the underlying firms.
• The monthly indices are generally not backfilled and represent the out-of-sample results. The exception is if we create a carveout of a particular subindex.
  • For instance, our Discretionary CTA index was launched in 2020, but historical returns were based on the structure and manager classification of the database as of December 2018.
  • In such cases, the indices will include managers that have stopped reporting to avoid survivorship biases.
• The daily indices have been partially backfilled based on the status of the database. We disclose the “go-live” date for affected indices.

NilssonHedge is discretionarily classifying strategies based on a semi-automated assessment of strategies, based on among other things keywords and potentially additional touch points with added managers. Our keyword search algorithm is similar to the one described in “Man vs. Machine: Comparing Discretionary and Systematic Hedge Fund Performance”.

Classification Framework

Some managers are easy to classify, and some other managers are not easy to classify due to their hybrid investment strategy. The classification always involves a certain amount of discretionary judgment.

We classify managers into four different categories:

• Type: The headline strategy, to name a few: CTA, Crypto, Market Neutral. We may not follow the managers’ self-classification of their own strategy but try to classify them based on our perception of the strategy and how the return stream behaves in terms of volatility, correlation, and betas to markets.
  • As an example, is that our CTA encompasses classical Managed Futures managers, Global Macro managers, and asset managers that may not have registered with the NFA and may thus not formally hold themselves out to be a “CTA”.
  • Likewise, we do not have a pure classification for Macro Managers, that may engage in trading of cash securities, swaps, and other instruments that are not typically part of the classical toolbox for a CTA.
• Style: Here we typically classify a manager depending on their investment framework. The main division is if the manager is systematic or discretionary.
  • As practitioners may have observed even strictly systematic managers have a large degree of discretionary elements, and discretionary traders may use systematic elements or models.
• Strategy: Based on the specific investment strategy implemented we further classify the return stream into a number of sub-strategies.
  • Trend Following, Fundamental, and AI are sample strategies. The Strategy category is more fluent.
  • Super strategies exist:
    • Quant, a new index, which consists of AI, Behavioral, Contrarian, Fundamental, Market Neutral, Short Term subject to a systematic implementation.
• Sector: The final classification is based on the sectors a program has exposure to.
  • Super Sector:
    • Commodities consist of all commodity sectors’ specific managers (Energy, Metal, and Agricultural) and managers that may have exposure to all commodity markets without a disclosed focus.

Transparency

Each week, we update the performance of our indices and present them in the below format via the NilssonHedge webpage. Moreover, we disclose the index members, per year. This can be found in a tabular form at the bottom for each Nilsson Hedge index.