NilssonHedge recently contributed a piece to the Hedge Nordic Special Report on Systematic Strategies. Here we introduced a useful heuristic for portfolio robustness. A measure that creates an easy to understand analogy.

The original post on HedgeNordic can be found here: https://hedgenordic.com/2024/06/a-new-heuristic-for-portfolio-diversification/

The HedgeNordic Special report can be found as a pdf here: https://hedgenordic.com/systematic-strategies-2024/

A New Heuristic for Portfolio Diversification

As portfolio managers, we strive to create the most robust portfolio, with the highest efficiency, be it the Sharpe ratio, the Information ratio, or any other metric that we find useful. We pack risk in the most optimal way possible by utilizing heuristics, mathematical formulas, or simply our judgment to solve a difficult multidimensional puzzle.

In Finance, this is done under uncertainty, which typically results in two kinds of solutions: Complex solutions relying on viewing the portfolio as a mathematical problem or practical solutions based on experience such as the 1/N concept. “All models are wrong – but some are useful”.

Heuristics or mental models should not be underestimated when it comes to putting together all the pieces. Even Harry Markowitz, the inventor of Modern Portfolio Theory, applied a much more naïve method than full optimization. He later updated his viewpoint to include a more well-diversified portfolio.

“I should have computed the historical covariances of the asset classes and drawn an efficient frontier. Instead, I visualized my grief if the stock market went way up, and I wasn’t in it—or if it went way down and I was completely in it. My intention was to minimize my future regret. So, I split my contributions fifty- fifty between bonds and equities.” – Harry Markowitz (“Your Money and Your Brain” – Jason Zweig)

We want to introduce another heuristic, the ‘Tipping Stability Index’ (“TSI”). The 50/50 portfolio is not a stable solution when viewed from the TSI viewpoint. In 2022, a bond/equity portfolio was anything but stable.

The Perceived Cost of Diversification

Diversification is a mentally costly problem, especially regarding portfolios managed by human portfolio managers. Homo Sapiens have limited cognitive capacity, the average individual can handle four different items in ‘working memory’.

The number of ideas in a portfolio that needs monitoring is thus limited. The proverb ‘put all your eggs in one basket and then watch that basket’ rings particularly true.

Skilled individuals can handle additional themes, but even those have limits. So, be skeptical about Portfolio Managers, claiming to have hundreds of trades simultaneously. Discretionary portfolio managers operate their ‘concentrated’ / ‘high conviction’ portfolios with great pride.

For a systematic portfolio, diversification is not cognitively costly, a computer does not have the same limitations as a human being. But clients and individual researchers do. Systematic portfolios can contain several thousands of stocks and hundreds of macro markets and those ideas still must be managed, understood, and communicated to the clients.

Most systematic strategies focus on one theme, e.g. Trend Following, Value, Momentum, Statistical Arbitrage, Short Term Trading, etc. Not because it is right, but because it is the path of the least resistance.

Quantitative strategies are structured this way, not because of a lack of creativity, but because it becomes progressively more difficult to explain a complex concept to the end investor or understand it yourself.

The Tipping Stability Index

We design a measure that is both easy to understand and tries to answer the question, how many themes/ concepts/strategies should be in a portfolio? What should N be?

The TSI is an observable measure of robustness and borrows from the design of an everyday common item – the chair. A chair with one leg is not stable but cheap to make, a chair with an infinite number of legs would be rock solid, but not economical.

As it turns out, five is a number that balances the incremental stability of an additional leg, combined with production costs. Almost all office chairs have five different legs. An office chair is largely impossible to tip over [do not try this]and would probably remain stable even if one leg broke.

As it turns out there is a simple formula for calculating the stability of a chair with equidistant legs: cos(π/N).

For any N, this function is increasing, but at a declining rate. In the chart, we see that a portfolio with one strategy has negative stability, “anything that can go wrong will go wrong”. A chair with three legs has stability but is sensitive to losing a component and ending up in a state with no stability (N=2).

An office chair with five legs is stable and can lose one leg without crashing or coming close to being dangerously unstable. Adding additional legs improves stability, but the marginal benefit is lower.

From a financial perspective, the number of legs is the cross-correlation between different strategies (groups) and an assumption here is that they are perfectly uncorrelated. Otherwise, the legs of a chair will concentrate on one side of the chair. Naturally, this is not a stable chair.

The height can be viewed as an analog to portfolio risk. The higher the chair and lighter the base, the less stable the chair is.

1/N What is N?

Any reasonable portfolio solution should contain at least three independent assets/strategies. This number also comfortably fits into the working memory of most humans. A natural progression is that any theme can consist of sub-themes, which further improves the stability of the solution (ensure that those strategies are also uncorrelated).

Equal Risk ensures that the legs are the same length. The leverage needs to be adjusted for the center of mass of the portfolio. Too much leverage and it does not matter how stable your asset mix is.

The ‘failure’ of the traditional bond/equity portfolios in 2022 was partly driven by the fact that the market changed. As the correlation shifted positive, the portfolio effectively turned into a one-legged chair. A TSI-based solution consisting of bonds, equities, and for instance, Managed Futures fared much better as seen in the chart. Substitute Managed Futures with your favorite uncorrelated strategy for similar results.

Summary

While the TSI is a simplification of how portfolios are constructed, it offers a minimum threshold to the

number of independent themes in a portfolio. Run a concentrated portfolio of three individual bets, you better have good backup ideas if one of them fails. If you are running a portfolio of three uncorrelated active sub-portfolios, you are likely in a better place.

A systematic strategy consisting of tens of uncorrelated strategies is in a better position to deliver a TSI-stable outcome. If nothing else, we hope that you checked the number of legs on your chair (we are almost certain it is five) but did not stress test the stability of your chair. Perhaps it is time to test the assumption in your ‘broadly’ diversified portfolio?

As with your chair, the key to a stable portfolio is finding truly uncorrelated strategies.

As part of our usual service to our database users, we compile the Top 5 and Bottom 5 managers per strategy (based on the data we have access to right now). We see some remarkable results. For more details, please feel free to dig deeper into the more detailed forecasts using the links below.

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided.

Market Neutral

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here.

Equity Long/Short

To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

When moving outside the normal noise in equity and bond markets, the big story in the Global Futures markets has largely centered around the Cocoa markets (there are two of them). Here, a large part of the profits for trend followers have been generated. And the decision to have this peculiar market in the portfolio largely determined the YTD for trend based strategies.

Last month, the market was rife with calls for Cocoa to continue to trend up. Pierre Andurand, someone who was accused of being a Cocoa Tourist, made a prediction of 20k a few weeks ago. We, like many other overly Futures Interested Persons, have developed a keen interest in the gyrations of the Cocoa market.

As we will show, the Cocoa market has been a really uninspiring to trade over the last decade. The Future that could not trend, suddenly became one of the trendiest trades around.

What was looking like an unstoppable rise came to an abrupt halt in April as the rain clouds moved in over the Ivory Coast. The supply outlook brightened. As the weather change appears to be somewhat sustainable, Cocoa prices reversed with a vengeance.

After a stratospheric rise in price from mid-2022, Cocoa saw a ~500% increase a price. In the last couple of weeks, it has reveres from highs of 12,000 down to close to 8,000 per ton. Post the reversal, the market seems to have calmed down and recent movements have been small compared to the recent past.

To illustrate the difficulties trading Cocoa, we simulate a simple Breakout strategy, i.e. if prices are higher/lower than in the prior X days, we go long/short. While no particular CTA is using a simplistic strategy like this, it gives an indication of how CTAs have been positioned.

Since 2010, until today, only the longer time frames seems to have been able to pick up any sustainable pnl over time. In this example, we are using a volatility based position sizing, reducing the giveback in the end. As a comparison, we simulate the same strategy, but without dynamic position adjustments.

Without volatility-based position adjustment, all of the time frames would have been loss-making, despite the recent rally. The chart below shows how a volatility sensitive trend strategy would have adjusted position levels. We observe two effects, the increase in price and the increase in volatility leading to a dramatic volatility reduction. This resulted in a 95% reduction in positions for a generic trend follower.

We also note that only the shorter time frames have switched position in Cocoa, from long to short. As volatility and price have subsided a bit, CTAs have started to add back risk.

If trading Cocoa futures was a true one-hit wonder, or if the market has changed the dynamic completely is something best left for the more knowledgeable crowd. Here, we note that dynamic position sizing seems to have reduced drawdowns and managed the pnl slightly better over time, compared to non-vol adjusted trend strategies.

Cocoa is not alone of being unprofitable for trend traders. Silver is another classical example that continuously suffers from whipsaw losses. But occasionally they will make the year for trend managers. True outliers are difficult to predict.

We have too few observations for April 2023 to report anything of value in comparison to our prior ‘Flash Report‘, although it seems like CTAs lost money in the last few days of the month, after briefly flirting with new highs. So, we will utilize this space to describe recent trends and developments in the NilssonHedge database.

The number of new manager inputs that are being added to the Database remains at the same pace as in the prior year, between 1,000 and 1,250 new returns sources per year. As per usual, most of our growth happens in the CTA and Crypto segment, where we have lower coverage of the traditional hedge fund strategies. In particular, Equity Long/Short is a segment that has grown at a higher rate than in earlier years, perhaps reflecting the results and investor interest within that segment.

To demonstrate the growth of the database, the charts above show the increasing data points collected and the number of unique return estimates. We are rapidly heading towards 15,000 unique input sources and more than 550,000 unique return estimates. We also have a large daily return set, including position-based data for a number of strategies. 

So, what can you do with this data source? 

• Benchmarking – Our benchmarking reports offer quick screening possibilities and arguments that can strengthen the case for a particular manager.
• Indices – NilssonHedge maintains a large set of both specialized and generic hedge fund indices. These are free to use and available for download via the Member’s Library.
• Dispersion – Is your performance above or below the average manager?
• Market Intelligence – The NilssonReport offers quick insights into industry performance.
• Hedge Fund Exposures – We track correlation and implied market exposure for our main daily indices.
• The Hit List – Crude ranking, based on absolute performance, across a large set of managers.
• And of course our main database.

Thanks for reading our public service announcement. If you would like to add your strategy to our database, please follow this link.

April continued to be an interesting month, from a macro perspective, with several interesting moves. We saw a significant streak of negative days in the equity markets, a depreciation of the JPY, and a mix of risk aversion and risk seeking behavior. We witnessed a somewhat well-advertised Iranian strike on Israel (in response to the killing of a senior revolutionary guard general), and a somewhat muted response. All in all, April brought a lot of unanticipated moves.

Post the Israeli response markets calmed down a bit and equity markets partially bounced back. The JPY depreciated at an increasing pace which triggered further opportunities for CTAs. Inflation continued to print higher numbers and the odds for a FED decrease any time soon are now rapidly being discounted out of the market pricing.

In terms of our daily performance barometers, CTA did well, although encountering slightly wobbly conditions mid month, they look to end the month higher. Equity sensitive strategies generally lost money on the back of a less than healthy equity market. Equity market neutral held up well.

In terms of CTA positions (derived from ETF) we see an increased exposure to Long USD (here shown as short exposures) provided good trading opportunities, long exposure to Energy paid off due to the increasing tensions in the Middle East. Base Metals performed well in light of a new restrictive delivery mechanism for the LME. All in all, a good opportunity for Trend Followers that made money in most sectors except for Equity. The darling of the last few months, Cocoa managed to avoid selling off, but seems to have lost a bit of momentum.

Interesting to see is that brief flirting with long positions in Bond Futures provided to be short lived.

In the next few months, NilssonHedge will have several interesting developments. Stay tuned, we are getting closer.

In the first quarter of 2024 Hedge Funds produced some remarkably strong result for Hedge Funds, partly driven by a strong equity market and the odd commodity (Cocoa and Gold plus a few other markets). Most of our rankings are skewed to the upside, i.e. the winning fund won multiples of the what the worst fund lost.

While we are not covering all Hedge Funds, our hitlists gives an indication of the performance in the tails. To the winners, a big congratulations.

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided.

Market Neutral

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here.

Equity Long/Short

To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

CTA strategies continues to do well, putting up strong numbers in Q1 2024. Our index looks to be up 4.6% for Q1and the index is now at new highs. That does however not make it easier to raise capital or to operate a CTA. We monitor the number of managers and entities that are registered with the NFA. A snapshot of the current statistics can be found here. Our time series can be found on our dedicated page.

The interested reader may note that we classify some managers as a CTA, despite them not being registered as a CTA. Our classification is functional, if a manager largely trades Futures or other Macro market, we tend to include them in our CTA classification. Any investor is requested to do their own due diligence and very the status of any potential manager that they are seeking to do business with. A good start is the ‘BASIC‘ service offered by the NFA.

The number of CTAs and CPOs may have stopped to decline, perhaps a reflection of the strong recovery by the average manager and perhaps a slightly improved asset raising climate.

To increase confusion, there are managers that are registered in multiple classes, e.g. both as a CTA and a CPO, depending on how you seek to do business. The number of managers continues to decline by close to 3% per annum.

The largest decline we observed was for the number of associates, a 5% decline in a single month. We are uncertain why this took place now. It could be a general cleanup of the number of firms, or a change in the overall framework.

We observed several new names of the last few years: Bitnomial, Clear Street, Coinbase, MFI, RobinHood, and WeBull to name a few. This partly reflect the Crypto Futures where several of the new FCM have a strong connection to Crypto Markets. More detailed FCM data can be found on the CFTC website.

Last week NilssonHedge went skiing. We do apologize if we have not gotten back to you yet. The database are updated and available for download.

The first quarter of 2024 was a solid quarter for liquid alternatives. While few managers have reported their estimates for March, it looks like CTAs had a stellar quarter, with a 7.1% quarterly result leaving other strategies behind. While part of it is driven by equity market longs, a large part of it is also driven by Cocoa, the magnificent breakout out of 2024. A ton of Cocoa is now as expensive as a ton of Copper as the market is being squeezed higher, partly based on dire fundamentals but also based on technicals.

Crypto Managers (mainly Digital Asset Allocators) had a stellar quarter, although gave back some of the profits into the end of the quarter. This was the quarter when the Bitcoin ETFs really took off, combined with the rumor surrounding the potential approval or disapproval of ETH ETFs.

Equity Long/Short strategies continued to benefit from the strong equity market trends as the market discounted additional easing from the Federal Reserve and they climbed a wall of worry as several strategists predicted a pullback, that is yet to happen.

Market Neutral strategies continue to be a strong streak. Since June-23 we have yet to see a negative number. While the returns are not spectacular, the streak from a well diversified quant equity portfolio has been very stable.

While Event Driven strategies have lagged behind, we are now seeing a small pickup in activity.

A strong quarter for all of the liquid strategies that we track. Thanks for reading and please do not hesitate to reach out.

An exceptional feature of Global Investment Report’s annual survey of the Top 50 hedge funds is that it tracks the subsequent performance of the latest featured funds while discussing evolving macro and industry trends.  Below is my discussion with the report’s author, Eric Uhlfelder, about his full-year findings.  Click here to see the year-end study and the full-year survey. This is Eric’s 20^th annual report. Learn more about the Global Investment Report here. You can find the 4Q Report here.

Eric: Thanks Linus. We definitely saw a reversal of fortunes between what the Top 50 did in 2022 versus what the latest group did in 2023. (Reminder: the performance in 2022 reflected the funds that were selected in 2021; and those tracked in 2023 were selected in 2022. More than two-thirds of the funds that made the previous year list have made the cut the following year (Methodology behind the selection is described on page 3 of the original 2023 survey).

To your question: I’ve been interviewing managers, allocators, and analysts to find the most compelling explanations for why so many PMs (and those in the Top 50) remained circumspect last year.

The best I can figure is that many successful managers saw little reason to rotate away from their cautious stance that had served them so well in 2022, in spite macroeconomic conditions improving with each passing quarter in 2023.

To be fair, there was strong consensus that the sharp rise in rates would trigger a cascade of problems that would metastasize. That simply didn’t happen in 2023.

The sell-off that did occur in the second half confirmed bearish sentiment. So many managers turned more negative only to get hammered when stocks soared toward the end of the year.

Eric: Several reasons. One, common belief is the rapid rise in rates in 2022 would take time before affecting economic growth and corporate profits. So far it hasn’t. Two, many mistook monetary tightening to mean a shift to a high interest-rate environment. It wasn’t. Current rates are at historically average levels. Three, managers and economists underappreciated several factors: the sustained economic boost from three major federal programs passed under President Biden, the shift in outsourcing from foreign to domestic firms to help meet just-in-time production schedules, and elevated household spending due in part to excess savings during Covid that has lasted longer than most economics expected. Let’s not forget the market rally is further fueling this virtuous cycle.

NilssonHedge/Linus: Which funds surprised you on the downside in 2023?

Eric: Here’s a list of well-established funds that had perennially made my survey but that won’t make my 2024 cut because they returned less than 5% in 2023.

• John Street Capital Systematic (2013)—Global Macro
• Schonfeld Strategic Partners (2016)—Multistrategy
• Schonfeld Fundamental Equity (2016)—Equity Long/Short
• Tudor BVI Global Macro (1986)
• Segantii Asia-Pacific Multistrategy (2007)
• Episteme (2009)—Systematic Macro
• Haidar-Jupiter (1999)—Global Macro
• Twin Tree Capital (2013)—Volatility Trading
• Arena Special Opportunities (2015)

Two things jump out from this sample list: they include a bunch of global macro and multistrategy funds.

On the macro side, the collapse of Haidar wasn’t a surprise because of how juiced Said Haidar was running his book. John Street’s decline wasn’t expected.  But it’s worth noting the fund had delivered exceptional returns in 2021 and 2022, which might’ve been indicative of rising risk taking.

Multistrategy funds generally did OK, led by Citadel Wellington and Millennium.  But collectively Schonfeld Strategic Partners, Hudson Bay, and Boothbay Absolute Returns underperformed short-term Treasurys. Segantii was slightly in the red and Episteme suffered one of its worst drawdowns.

Eric: Performance of most strategies, including multistrategy and macro, are somewhat cyclical.  I wouldn’t write them off. 

But you’ve raised the point yourself Linus that multistrategy funds have become increasingly expensive and highly competitive when it comes to talent.  Both factors weigh on net returns.  Even Ken Griffin suggested the strategy’s best days may be behind it. 

I’m more worried about the bolt-on manager approach to multistrategy.  This presents a fundamental integration problem: a compromised work culture due to muddled sense of common allegiance and purpose.  (An apt analogy could be the struggles plaguing Boeing because it shifted so much work to independent outsourcing.  Maybe.)

I never thought this fragmented style of fund management could produce a better and enduring investment process.  We’ll see if the current spate of layoffs leads to any fundamental changes in process. I personally don’t think so.

NilssonHedge/Linus: What about your equity funds ?

Eric: The Top 50 hedged equities struggled. I don’t think this was due to minimum exposure to the Magnificent Seven as many have said. According to Forbes, the other 493 stocks in the index generated total returns of more than 10% and European and Far Eastern markets did nearly as well as the S&P. Underperformance was probably due to managers being more market neutral than materially net long.

Both Lancaster Absolute Return and MAK Capital had great 2022 returns. But Lancaster was initially stung last year in being part of the Odey fund group, which got hit by Crispin Odey’s unfortunate personal conduct. This forced its managers to significantly reduce exposure with the looming loss of it service providers. This locked in some initial declines. MAK Capital, a remarkable long-term performer, took it on the chin because the PM simply didn’t think the pain he profited from in 2022 was anywhere near over.

The second-half sell-off helped both funds rally. But they both got tagged when the market took off toward the end of the year.

NilssonHedge/Linus: Any good news to report?

Eric: Sure. Just look at the table below. These are the ten best performing funds in 2023. They ranged in strategy from emerging markets, statistical arbitrage and relative value, to hedged equity and multistrategy. Funds were as small as $600 million to as large as $43 billion. They are based in towns across the globe from Seattle to Boston, Toronto to Pfaffikon and Abu Dhabi.

This collection of familiar and little-known managers reflect the diversity and consistency of funds that comprise my survey year in and year out.

More important, they have delivered consistently decent returns over the medium- and longer-term. Nine of the ten made money in 2022–the worst performer having been down just -4.6% that year. And if you turn to the main tables in the survey, starting on page 7 of the original 2023 report, these funds have generated attractive risk-return profiles with limited correlation to the market since inception.

Eric: I think that’s the most important metric, so long as the same investment team, strategy, and process are in place. (Again, please turn to pp. 7-11 in the main report.)

Consistent long-term risk-adjusted returns that are uncorrelated to the market is the purpose of investing in hedge funds. But all hedge fund investments need to be regularly monitored. Things change, and as former US Secretary of Defense once said, “Stuff happens.” Due diligence does not end after an investment is made. It’s just getting started..

Let me circle back to previously mentioned funds that have lost their place in this year’s survey. Their exclusion doesn’t mean they’re no longer attractive funds. I maintain a strict hurdle for the purpose of maintaining a high bar to help investors target the most consistently performing managers. A decision to sell out of or invest in these funds requires a more in-depth review about what went wrong in 2023, and if underlying problems have been corrected.

But one shouldn’t give a pass even to just one year of significant underperformance. Such a stumble is one of the most meaningful indicators that something may be off.

NilssonHedge/Linus: So you would tell alternative investors to remain focused on the industry?

Eric: Yes. But doing so with great care. Keep in mind that when considering 2022 and 2023 net returns, during a bear and a bull market, we see a different picture.

In 2022, while the S&P 500 lost more than -18%, the Top 50 gained more than 9%. The market’s total annualized return over the past 24 months was 1.7%; the Top 50 added 7.1%. Over these two years, these select hedge funds delivered stronger returns with far less volatility and drawdown and limited market correlation.

Since I adopted the current methodology in 2018, this survey has continually produced the same finding when looking at trailing five-year periods and since inception.

While the composition of the Top 50 does change from year to year, more than two thirds of the funds that make the list qualify for the following year’s survey.

NilssonHedge/Linus: Thank you Eric, it has been a pleasure having you here again.

Occasionally it is useful to take one step back and look at longer data trends. Today, we do so, and look at what has happened over the last year using our index data. Except for Crypto Strategies (primarily buy and hold), we have seen reasonable stable results from several hedge fund strategies. Remember we are looking at averages, and specific managers will have results that are deviating from the average result.

CTAs and Event Driven Strategies have largely underperformed the index cohort with an average result of 3.0%. Traditional strategies range from Risk Premia (5%) to Equity Long Short (7.0%). Asset Allocation is a strategy group driven by long-only allocations to bonds and equities and has done in line with the rebounding markets.

While this is a short horizon, it is noteworthy that Risk Premia strategies delivered the most uncorrelated results during the last 12 months. The strategy that was the most correlated to Risk Premia was (Equity) Market Neutral strategies. This suggests that market neutral factor did really well. Here we also see that these strategies managed to retain market neutrality with a low correlation to Equity and Fixed Income (Hedge Fund) strategies.

Crypto strategies, usually seen as a leveraged Nasdaq position, delivered strangely uncorrelated returns. Perhaps driven by the ETF launches that created their dynamic in terms of flow-driven price increases. This is not the norm that we have seen before. We have seen the beta of Crypto to Equities go from around 2.0 to essentially uncorrelated.

Despite some rather aggressive position shifts for CTAs, they had above-average correlation to other strategies and markets. This may be partly driven by the overall long-ish exposure to Equities. Bonds saw variable positions.

We have one or maybe two too many CTA indices, but they allow for a more detailed benchmarking exercise of a strategy group that is broader than what one thinks. We can see some distinctive patterns. The March-23 madness saw difficult markets for the broad trend managers (Systematic Momentum) but the group managed to print a small positive result for the 12 month period. The group that struggled the most was Discretionary Macro managers, followed by Systematic Commodity strategies.

Equity and Option strategies did the best and printed results of around 10% for the period. This is related to the relatively benign volatility picture that we have seen as of late. The prior stars in the Commodity markets, the Energy traders, had a lackluster period.

Our index is free and you can access it from https://nilssonhedge.com/my-account/free-data/.

One of the more recent innovations in the CTA universe is that trend following strategies can be accessed through the ETF format. These securities typically have to make design decisions to fit market makers (i.e. fewer markets are preferred over more markets, slower trading strategies, and a preference for US Futures). There is more day-to-day trading in these than what a typical CTA would expect and therefore these are generally sound design choices. Focus on liquidity and predictability. Obviously, there are also Exchange Traded Funds that have a different market selection.

In most cases, these are solutions that work well or even better than well as seen through most of 2022 where ETFs outperformed our index due to a higher allocation to short fixed-income futures.

Except when you have idiosyncratic moves such as the super trend in Cocoa.

We have only found the Trend Following ETFs with a small exposure to Cocoa and there is a comparatively small exposure. In the first quarter of 2024, this is a decision that has influenced the performance of fully fledged vs liquidity-focused managers.

To create a fair comparison, we create an average of the largest Managed Futures ETFs and compare that to the volatility-adjusted NilssonHedge CTA Index. Given the short time horizon, we do not adjust for interest rate earnings. We note that the Volatility Adjusted Index has done better than the ETF Composite. Some of this relates to fixed income and currency trading, where managers have been whipsawed. Some of of it relates to the Food of the Goods, Cocoa, which has been a significant contributor to many CTAs.

When the trend eventually bends, we will who has managed to protect their profits, and who was late through the door. Cocoa is not the most liquid commodity market. Recently the trend has flattening and we have seen Volume and Open Interest decline.

Using our dispersion measure across CTA strategies, we note that the span (with only two months of return data) is wide, ranging from around 1% to above 8%. We expect the range to be reduced, but this should serve as a reminder that not all strategies are the same. Remember that we are looking at the first and third quartile dispersion and 50% of the the managers are better or worse. Early reporting and other database biases may contribute to the dispersion.

Picking CTAs is not an easy sport, and in most cases, you need more than one to pick up the risk premia. Market selection, and time frames are short and long-term determinants of the realized performance.

February was a strong month for most liquid alternatives:

• CTA generated +4.3% in Feb in what looks like a strong return to prior quarterly patterns with substantial returns in Q4/Q1.
• Equity Long/Short managed to capitalize on the strong equity markets and printed +2.3%.
• Market Neutral (+0.5%) had a modest month but has established a nine-month streak of positive returns.
• Event Driven (+0.2%) was positive but has struggled to keep up the pace with other liquid alternatives.
• Crypto Managers took the top position with a +36.1% return, an exceptional recovery partially driven by strong flows into the recently launched ETF products.

For CTAs, long position in equities drove profits and the difficult to trade Cocoa added substantial profits. Cocoa is a commodity that has been historically difficult to trade for a larger number of CTAs, but in 2023/24 that appears to have changed substantially.

Equity Market Strategies were dominated by the increased odds on an earlier FED interest rate easing cycle as well as the continued strong performance of the AI related companies. Major US indices are trading a new highs.

The demand for Bitcoin ETFs resulted in a substantial rally in the major crypto currencies. February 2024 was the best month since the frothy days of 2021.

With a an eye toward one of the more epic Public Service Announcement, we dig into recent position changes for Trend Following strategies. CTAs have recently changed their positions rather radically. The increased uncertainty in the Middle East and what looks like a postponement of the start of the FOMC easing cycle has caused positions and correlations to change. In this short post we try to ensure that you know where your CTAs are.

CTAs had a really good start to February, with ten positive days out of twelve observations and eight continuous positive trading days from the 1st to the 12th. The string of eight positive days is unusual, we have seen only nine prior observations that was of the same length or longer. The longest run of ten positive days took place just a few days ahead of the 2023 Fixed Income reversal that wrecked havoc to Trend Followers. Other runs have not resulted in subsequent losses.

We try to keep track of the major exposure through a number of different metrics:

• Daily Indices
• Correlation to Major Exposures.
• Sector / Market Positions through ETF data (limited data available upon request).

When looking across the sectors that CTAs have exposure to, we note that Long Exposure in fixed income has moderated somewhat as the FED has toned down the chance of an early reduction in the policy rate. This had a strong impact on performance of the US Dollar, and managers added to their long USD positions (shown as a short position above as the Futures are typically long the foreign currency). Energy markets are back in long territory, as the increasing uncertainty surrounding the situation in the Middle East drove prices higher.

Correlation is a lagged measure compared to position data. We note that the Currencies exposure has gone from a solid short US Dollar exposure to a flat correlation. This measure is thus lagging the observation we see in actual position data. Likewise, the bond positions are back to zero correlation which may highlight that non-ETF managers are responding more rapidly to price changes than the ETFs are. Or that our correlation measure is picking up something different than pure fixed income exposure.

In terms of underlying positions, Equity Futures represent the largest longs and short positions in Euro and Yen represent the largest shorts. Fixed Income positions (re-adjusted to 10-year equivalents) are long except for exposure to the short end of the curve.

Cocoa has been one of the Futures markets that has caused headlines. The Financial Times recently covered this: “Hedge fund stampede into cocoa futures fuels record price jump“. For the strategies we follow, we do not observe an Cocoa futures and given the relatively low liquidity of the market, do not blame your trend followers, but Discretionary traders and perhaps panicked commercial participants that are scrambling to find supply at a good price. For Trend Follower, Cocoa is a long exposure.

We appreciate that you follow our website. Please feel free to reach out to discuss your data needs or analytics that we can assist you with.

One of the Alternative Data sets that we track is the number of NFA members. The NFA is one of the cornerstones when it comes to ensuring compliance among Futures based strategies. Membership is largely mandatory and you can track the number of registered members here: https://www.nfa.futures.org/registration-membership/membership-and-directories.html. We track these numbers over time.

From our perspective, this helps us to know how many CTAs we are not tracking. Quite a few as it turns out. Some of the CTAs that are not publishing their numbers are doing so as the CTA part of their strategy is not their main strategy. Or the manager is in a startup or a sunset phase.

We track these measures over time, which enables us to get a read on how popular Managed Futures/Liquid Hedge Funds are. It is one measure amongst many. Since we started to track these numbers, we have noted an annual shrinkage of approximately 3% across most categories. The only category that has not shrunk, is the number of FCMs. At the same time, we see stable assets under management. This likely indicates that the universe of eligible managers is becoming more concentrated.

Category	Annual Decline (since May-2021)
Associates	-3.2%
Commodity Pool Operators	-1.9%
Commodity Trading Advisors	-3.1%
Exchanges	0%
Futures Commission Merchants	0.7%
Introducing Brokers	-4.7%
Swap Dealers	-0.6%
Total Membership*	-3.0%

Part of this is likely structural, change in how Managed Futures strategies are distributed, i.e. the shift towards 40-act and ETFs funds which are sold through platforms rather than introducing brokers. Part of this is also likely related to declining ‘retail/HNW’ interest in CTAs and an anecdotal shift towards Private Assets.

Introducing Brokers are to an extent the agents that connect managers with investors. This is the hardest hit category, shrinking by almost 5% per year. This would be a clear indicator if it is easy or hard to sell CTAs to investors.

In terms of the managers seeking to do business as a CTA or a CPO, the trend is also negative. Going into 2023, there was a small uptick in the number of registered CPOs, but that reversed quickly as 2023 turned out to be a poor year for most CTAs.

In January we saw the largest decline in the number of Associates, i.e. individuals working in the Futures Industry. We recorded a decline of 687 individuals no longer seeking to do business.

Some preliminary observations are based on early data input from a limited set of Managers (we have only had two proper business days in February, so please allow some additional time).

• CTAs did well, MTD: +1.4%
• Equity Long/Short enjoyed strong equity markets: MTD: 1.5%
• Market Neutral did exceptionally well, MTD: +2.2%. Here we have a near-perfect string of returns.
• Event Driven had a flat month (MTD: 0%).
• Crypto lost 2.5% during January. A month where buying the rumor and selling the news dominated the path.

While most of the correlation remains as expected, correlations (and exposures) have shifted materially for CTAs. We have seen persistent short biases in bonds shifting towards long biases. Remember that CTAs have not had a positive correlation to bonds for more than two years, so this is groundbreaking in terms of correlation expectations. Likewise, the equity correlation is picking up and for the next few months, CTAs will behave somewhat like Risk Parity strategies

We can verify this by looking at actual ETF positions. We see the same pattern here, rapid exit from Fixed Income shorts and longer in other markets. Perhaps not surprisingly we see the same pattern here.

Index updates are in progress and new members will be announced on the webpage in due course.

We are rapidly approaching the end of January and the cut-off point for our indices. If you would like your strategy to be part of the constituents for 2024, please ensure we get your numbers before the 31st. This is the last call.

Our indices are free to use (in stark contrast to some of our competitors) and are fully transparent with disclosed constituents. We strive to provide the best estimate of several Hedge Fund strategies, and sub-strategies within each group. This year, we are also publishing additional Crypto Strategies (Market Neutral, Digital Asset Allocators, and Crypto L/S). These indices have been part of the index distribution pack for some time.

Index Data can be downloaded here (you need to be logged in): https://nilssonhedge.com/my-account/free-data/

Feel free to explore the different indices, and we are looking forward to including your strategy in the 2024 class.

2023 was a year with a lot of winners. A year where markets turned rapidly a number of times, depending on the tact and tone of the Federal Reserve. Throughout the year, we saw dramatic shifts in market sentiment, with sectors such as technology, healthcare, and renewable energy experiencing significant growth. The Federal Reserve’s nuanced approach to monetary policy continuously shaped investment strategies and market dynamics, creating an environment of both opportunity and volatility. The ‘nuanced’ approach caused problems for CTA with two major shifts in interest rate policies.

Based on the most recent return data available, we are thrilled to offer a comprehensive overview of the top-performing and bottom-performing strategies for each category, taking into account both monthly and yearly results. Our analysis is derived from proprietary composite data streams that we have diligently compiled. It’s important to note that while we strive for accuracy, there is always the possibility of minor errors in our calculations.

As a small reminder, if you want your fund to be included in our inidices, we need your December 2023 data before the end of January.

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided.

Market Neutral

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here.

Equity Long/Short

To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

 

We have not done this in some time, but at the beginning of the year, we thought it would be prudent to give a short overview of our Hedge Fund Manager return data set.

• We cover a large number of Liquid Alternatives, with a focus on Macro, CTA, and Crypto Managers.
• Throughout 2023, we improved our coverage of Liquid Alternatives in other Hedge Fund strategies.
• We added more than 100,000 monthly return estimates for managers and more than 2,000 funds including beefing up our graveyard of past CTAs.

The origin of the Database skewed us in the direction of Futures-based strategies. Including the graveyard, we have coverage of closer to 3.7k CTA and 1k Crypto strategies. There are an additional 1.3k strategies across other liquid Hedge Funds.

We process more than 14,000 different return streams, consisting of more than half a million database points. We strive to be transparent in terms of survivorship, when a manager starts reporting, and when they are closing. Moreover, we keep track of changes to returns, correlation matching, drift, and updates. We hand classify a large number of strategies to align with our Hedge Fund strategy taxonomy.

On a snapshot basis, the Monthly Database contains 3469 different managers, representing 6823 different investment strategies. For the current reporting month, 1708 managers have reported returns. For the prior month, we have 2393 live managers.

This database is among the cheapest on the market, we focus on returns, and do not carry a large amount of qualitative data making it a good match for quant-focused investors. We also provide more assistance for the less quantitatively included investors.

Over the last three calendar months, we have added 624 new strategies to the database. These may not always be unique new funds, but may also be connected to return streams that already exist in the database.

So, if you are looking to grow your analytical capabilities, do peer group research, or find new managers to allocate to, feel free to reach out to discuss your data and analytic needs.

As part of our annual maintenance cycles, our daily indices were fixed at the end of the year, reflecting available funds that we have daily transparency on. These typically reflect “listed” funds, i.e. UCITS/40 Acts formats. We tend to use an average of several share classes to reflect the actual investment experience.

You can view each constituent on the individual index page. We do not rule out that we have misclassified a particular strategy, and please let us know if you believe a fund should belong in a different category.

• CTA/Managed Futures Index
• Equity Long Short
• Equity Market Neutral
• Event Driven Index
• Crypto Strategy Index

As a casual reminder, if you want your fund to be part of our Monthly Indices, we need your (preliminary) December 23 return before the end of January 24.

Our indices are freely available for download (subject to a user account) on this page: https://nilssonhedge.com/my-account/free-data/. We strive to keep our performance indicators public and fully transparent. For advanced users, we can enable API access.

We do realize that you probably have other things to do today, and first of all we would like to wish all of our clients a Merry Xmas and a Good New Year. 2024 will be an exciting year. At the same time, we woudl like to publish our best and worst list for November 2023. A month with a lot of interesting winners.

Just a reminder, if you would like to be included in our indices for 2024, please ensure that we have your (preliminary) December numbers at the end of January.

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided.

Market Neutral

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here.

Equity Long/Short

To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

As one of our projects for 2023, we had promised to start looking at the CTA ETFs. The nice thing with these, except for costs and pricing transparency, is that they offer full portfolio details. We finally got started and have now started to collect the data to see how they replicate or execute Trend Following strategies.

As a partial result, we started to collect data from $DBMF and $CTA, because they are offering interesting insights into design choices. There are five CTA ETFs with total assets north of one billion. They do not certainly not dominate the landscape for active trend followers, but they have grown rapidly. ETFD.com has a nifty list with facts and figures.

One thing to note is that the decisions made by each advisor are very different. We expect some of them to even out as we get more data. Some of the design decisions strike us as odd, but regardless of that fact, most of the CTA ETFs have done a good job of following fully-fledged managers.

There is a relatively high position concentration, with the DBMF being the most concentrated portfolio, holding only 13 different Futures. The Simplify Managed Futures ETF has 47 different Futures contracts, but only 14 distinct Futures markets. The positions are spread over various maturities.

As seen above, the notional exposure is dominated by Fixed Income, especially shorter-term fixed-income instruments (the SOFR contract, representing a 3-month instrument). To make the sector picture somewhat clearer, we can for instance adjust the Fixed Income exposure to "10-year" equivalents. Here we adjust the notional to indicate the rough equivalent of all of the Fixed Income exposure if it would have been a single ten-year bond position.

While it is still early days, we note that CTAs are reducing the Fixed Income exposure relatively slowly. Some of the funds do not trade frequently. The chart is dynamic on the website but may not be so in email. The chart can be accessed here: https://datawrapper.dwcdn.net/lvd79/1/

CTAs are still mostly short assets. Fixed Income and Equity positions contribute to the recent "whipsaws". The recent rally in Financial Assets has resulted in a small reduction of these positions. As long as the market is in Christmas rally mode, CTAs look to be wrongfooted.

Thanks for reading, we aim to publish one more update this year and will be on holiday between Christmas and New Year.

Surging equity markets helped Hedge Funds to a positive November, bond rally caused headwinds for CTAs, Crypto Managers making a comeback.

Across our traditional alternative indices, we note that our Risk Parity and Risk Premia have printed the strongest numbers for the year. This is in part driven by the strong performance of the beta, but also the comeback of several option-related strategies (for instance the option writing CTA index is printing strong numbers).

The strong equity markets (US: 8.9%) helped to lift the average Hedge Fund to strong results. Equity Long/Short was one of the main beneficiaries of the rally and printed a positive return of 3.2%. One of the drivers of the equity rally was softer inflation numbers, which also resulted in a bond rally.

For CTAs, the action was much less favorable in November. Bond markets rallied, which caused short-ish positions for CTAs to incur losses. Our correlation monitoring still indicates a short position for CTA.

While the 4th quarter is usually strong for CTAs, this year, there has been a distinctive lack of trends in the last quarter and the trend seems to have continued into December.

On the Crypto manager side, we note that the impact of the Bitcoin rally has had a positive effect on directional Crypto Strategies, and while lagging behind the BTC, this is a strong comeback.

While some distance from its prior peak, the NilssonHedge Crypto Index has recorded a gain of 56% for 2023. But, the average manager is still in a 60% drawdown and needs to generate another 150% to bring back the index to the prior high. The math of drawdowns and high risk investing can be daunting at times.

Don’t forget to signup for our weekly updates.

Global Investment Report’s survey of the Top 50 hedge funds is unique industry research. This year is the 20th edition of the survey, which previously has been featured in The Wall Street Journal, Barron’s, FinancialTimes, and Institutional Investor. An exceptional feature of the annual survey: it then tracks the subsequent performance of the select 50 funds while discussing evolving macro and industry trends.

Inside this issue:

The Fed

I think the Fed support of markets was already demonstrated when it recently decided to keep rates steady even after US GDP growth came in at an astonishing rate of 5% with solid employment numbers.   I think its actions had much (but not all) to do with three straight months of market declines, which clipped off more than 8% from the S&P 500.

So everyone was happy to see rates holding steady, but some were mystified that macroeconomic conditions still appear to demand more restrictive monetary policy.

On that front, the Fed is continuing to quietly put upward pressure on rates through its robust quantitative tightening ($75 billion per month), which I believe is a good thing.  But over the past month, we’ve seen Treasury yields easing.

If we’ve learned anything over the past 20 years, it’s the need for the government to keep some powder dry for the next crisis.  And this segues right into your question: will the Fed ease tightening if markets conditions get dicey?

Save for a market collapse, I don’t think the Fed will cut rates if macro conditions don’t merit it.  Taking some air out of the markets is probably a good thing.  But when you look at the equally-weighted S&P 500, performance is far more modest, which further confuses matters.

US Elections

In theory it shouldn’t because the Fed is independent.  That said, I would think the administration would want to get all the support it can muster to help offset the current economic doubts that polls persistently show.  Declining 401Ks and rising unemployment are certainly two things Biden doesn’t want to be facing in the summer of 2024.

As for easier trading conditions, I think you’re really asking: will there be more discernable trends for managers to ride?  I have no idea.  Hedge funds are being paid handsomely for their investment acumen, so frankly I don’t think that should really matter.  But we know it does.

Closing the Performance Gap

Everyone’s familiar with the adage that the market can stay irrational longer than investors can remain solvent.  That’s what many managers are so fearful of because they see the disconnect between what should be happening with soaring rates and geopolitical risks versus the good times a portion of the market is still enjoying. Institutionalization of the hedge fund industry has imbued caution in the way managers are erring.

That’s not to say that most of the Top 50 aren’t making money.  They are, and some are doing very well (see table below).  But on average, not so much.  And I’m not sure how as a group this most consistent list of managers can escape the disconnect between what the market is doing and what worries them.

Active Management

No.  Last year, the Top 50 collectively outperformed the market by nearly 24 percentage points.  If you add in this year to the calculus, these funds are still outperforming the market over a nearly two-year stretch.  (Note: more than two-thirds of last year’s funds made this year’s list.)

That sounds like I’m making an excuse for this year’s performance. Not really.  I’m trying to understand it, because selecting time frames for judging performance is always subjective.  But it does put this year’s returns into a broader perspective.

Investors pay for active hedge fund management to generate more consistent returns with less volatility.  That’s what we’re seeing.  In 2022, the Top 50 managers generated average gains of more than 5.25%.  They are on track to generate about the same level of returns for 2023.

The S&P lost more than -18% last year and this year through November the market is up more than 20%.  So over this two-year period, investors would’ve done better being in the Top 50 instead of the market.

Is a recession around the corner?

The Bloomberg Chart (above) you’re referencing, which correlates tighter lending standards and recessions since 1990, currently highlights two factors: one, there’s a time lag between when rates sharply change and are then felt in large pieces of the economy; and two, there’s already evidence of rising default rates across the board, led by auto loans and credit cards, with mortgages following suit.

Bloomberg reported in early October that, “The latest reading shows that about half of large and mid-sized banks are imposing tougher criteria for commercial and industrial loans . . . The impact is set to be felt in the fourth quarter of this year and when businesses can’t borrow as easily, it usually leads to weaker investment and hiring.”

One thing that could challenge that forecast is the exponential growth of the shadow banking industry, which includes hedge funds that lend.  Since the financial crisis, many non-bank lending entities have done well filling in where banks have left a void.  But in the recent past, they weren’t faced with firms needing to refinance cheap money with much more expensive loans.  That begs the question: can troubled companies manage with near and at double-digit interest rates?

Opportunities and Risks for Credit Funds

The argument smaller fund managers make: they target smaller companies and loans that larger lenders don’t bother with.  Their due diligence seeks value in lending when there’s proof of sufficient cash flow to repay short-term loans, typically less than three years.  These managers also claim to lend only when they are high up the capital structure, i.e., first in line for payment or well positioned to exploit post-bankruptcy reorg equity.

The real problem for underlying investors is knowing that managers stay within their wheelhouse or will they be tempted by significantly discounted paper and high yields to take on more risk?

It’s not easy.  But several things LPs can do is to maintain regular communications with the PM about its lending standards.  Ask to see them.  Make sure they are indeed maintaining first-lien status and that borrowers’ businesses and financial status are well vetted and understood.  

Then ask how often loans are marked to market and what it takes before a declining valuation actually shows up in a fund’s balance sheet? Also ask managers if their pace of loan restructuring and bankruptcies is increasing or stable.  These are usually good indicators whether or not they are digging themselves into a hole.

Another telling metric is to see what kind of financial skin the principles of firms doing the borrowing have in their business.   And the same goes for your hedge fund managers.  The more the better.

This sort of due diligence can help assess risk.  But it assuredly doesn’t eliminate it.  If you can’t get specific information on these points, that’s not a good sign.

Due Diligence

Correct. This is the first time I’ve stopped reporting on any fund after many years of managing a global hedge fund survey.  And the reasons for doing so are highly unusual, not involving liquidity or gating issues.

The Ramius Merger Strategy (47^th ranked) was launched more than a decade ago.  The fund was one of the most consistently performing within its strategy.  Its net annualized returns over the past five years and since inception were around 7%. 

I profiled Ramius last year.  It was part of Cowen Capital, which managed nearly $15 billion in assets.  But earlier this year, TD Bank closed on its purchase of the asset manager.  According to sources inside the fund, the bank oddly decided to close down the fund due to the lack of investor interest.

Leibniz EMOTION (7th-ranked) returns will no longer be posted because a recent disclosure indicates the fund has been reporting “simulated” (re pro forma) numbers.

This was the first year I included this statistical arbitrage fund in the survey.  I spoke with the manager.  The fund reports to various reputable databases. It has a reasonable presentation document and DDQ, where the manager reveals an impressive professional pedigree.  Early this year, With Intelligence published an article that clearly stated the Leibniz Group was managing more than $1.5 billion and the fund itself had been linked with many well-established asset managers, including Soros Fund Management and Schonfeld Strategic Advisors.  And the manager was profiled in the Hedge Fund Journal, as one of the Fifty Rising Stars (Tomorrow’s Titans 2021 page 23). 

I’m not questioning whether the performance numbers I cited were accurate. But what I’ve just learned made it unclear if they reflect actual investor returns. Footnotes in a recently seen Leibniz document state simulated numbers were mixed into the results.

As of this interview, Leibniz has not responded to my request for further clarity.

Bottom line: Both examples highlight the need for all potential investors to perform their own in depth due diligence before even considering investing.  The value of this survey is to reveal a breadth of the most consistently performing managers. But I always emphasize my work is but a starting point to help narrow the search for funds that may be worth a deeper diver.

Thanks, Eric, this has been a really interesting discussion. A version of the quarterly report and main survey (not for commercial distribution) can be downloaded here.

Based on the most recent return data that we have available, we can provide a comprehensive overview of the top-performing and bottom-performing strategies for each category, taking into account both monthly and yearly results. Our analysis is based on proprietary composite data streams that we have compiled, but we must note that there is always the possibility of errors or inaccuracies in our calculations.

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided.

Market Neutral

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here.

Equity Long/Short

To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

We have recently noted that transparency in the CTA universe has declined drastically. One of the premier daily indexes, with an extraordinary long-term history, has reduced transparency and is essentially restricted to clients.

The full index history was previously available through their webpage, from their calculation agent, and through a number of different sources. Nowadays, only a fraction of the performance is available for download (~last year), and only so on a monthly basis, rending it less useful for benchmarking.

We were notified by one of our clients, that shared the screenshot below. While NilssonHedge is not on Bloomberg, due to costs (please feel free to reach out to your Bloomberg account manager and request the data to be available through the Terminal), we offer unique access to the daily hedge fund indices through our website.

Historically, this index (or family of indices as they provided historic returns for CTA, Trend Followers, Short Term Managers, and Risk Premia strategies), has been available for transparency purposes without special arrangements. While we do not know what lies behind the decision, we know that there is one ETF seeking to replicate the index.

At NilssonHedge, we have a slightly different composition of our index (mainly more different managers), but something that historically has had a high correlation to the SG CTA Index. Our Index has a near perfect correlation, with only a small dip during the Covid crisis, where manager dispersion was high.

Our index lags the blue-chip index substantially. This is partially due to higher fees, but maybe also due to SG’s focus on the bluest of the bluest CTA in their index. We generally take everything available through fund structures which comes at higher fees.

To access our Daily Indices, do one of the following:

• On the front page, click “Get the data” from the chart on the main page of www.nilssonhedge.com
• Access it through the member library. This requires you to sign in as a member of the website. https://nilssonhedge.com/my-account/free-data/
• Add the free index data to your Data account, by completing the checkout process: https://nilssonhedge.com/product/index-data/

Due to the rapid increase in the Risk-Free rate, there has been an increased focus on the so-called Hurdle Rate, the rate of return required before a manager can start to collect performance fees. A large number of investors has started to ask if the increased risk-free interest rates should have implications on the minimum required returns.

As the Fed Fund rate has increased, generating 5% per year becomes a rather uncomplicated task and does not require “skill”. In this short post, we explore the implications for various strategies and how we think about the issue.

BNP’s Capital Introduction Team recently published a report on expectations in a high-interest rate environment. Among other things, they covered the increasing demand for a hurdle rate to be implemented in fee agreements. Not surprisingly, they find that 90% of the investor believe that Hurdle Rate should be in line with the Risk Free/Market Beta, while only half of the managers agree with the statement.

A Hurdle Rate is, ceteris paribus, beneficial to the investor. As seen in the chart, a hurdle rate of 5% (current risk free interest rate) gives the investor an additional return benefit of 1% if the return is above the hurdle. Conversely it is detrimental to the economics of the Hedge Fund manager. Here we cheeckishly assumed that the performance fee is calculated before the deduction of management fees.

Without a Hurdle Rate, an unethical manager could simply go to cash, and generate 5% gross returns which translates into a 5%-2%(management fee)-20%(5%-2%)(performance fee) = 2% net return. While not a sustainable business model, the hurdle should incentivize the manager to take risks.

Even without a hurdle rate, 3% net should not be viewed as a strong result from an absolute return perspective but is a nice carry for a manager struggling to find alpha. This should be kept in mind when evaluating funds. For managed accounts or leveraged strategies, it is slightly more complicated.

As anything else, the devil is in the details. The Hurdle rate should be a function of the unskilled investment opportunity. For managers that are correlated to market beta, the right hurdle is probably the beta based return. As an example, for an Equity Long/Short Manager, the hurdle is probably the long-term market equity beta of the manager, which typically is around 0.5.

For CTA funds, the risk free rate of return simply lifts the expected return of the fund. For an example of this, have a look at how many of the Managed Futures ETFs are structured. Futures positions alongside a healthy holding of T-Bills. The Simply Managed Futures ETF illustrates this nicely, 90% of the fund is in T-bills. Most FCMs allows you to deposit Treasury Bills as colleteral for initial margin.

For Managed Accounts, which often are partially funded, only the allocated cash should count towards the Hurdle. To make it easier, you could write your fee arrangement based on Excess Returns and allocate the interest rate earning to a separate account. We note that the earned interest rate also require adjustment to performance ratios.

Summing it up, the Hurdle Rates are beneficial the investor. As the risk free rate is higher, funds should adopt hurdles that are in line with the current market climate. The larger the investment is, the easier it will be to agree on customized terms.

Based on data from more than 1,200 funds, October was a weak month for the hedge fund industry. The exceptions are Crypto Managers and Equity Market Neutral which produced gains. Crypto Managers are still generally lagging behind BitCoin. Continue to explore our free resources to understand Hedge Fund strategy performance.

• Trend Following CTAs lost on average. The NilssonHedge Daily CTA index ended October down 1.5% and is now marginally negative for the year.
• Large Equity Market Neutral managers managed to deliver positive returns. The NilssonHedge Equity Market Neutral index posted a gain of 0.8% in October. The index is up close to 6% for the year.
• Crypto Managers came back to life with a double digit gain. Our Daily Crypto Index record a gain of 14% for the month. Our broader monthly index which also includes strategies reporting monthly recorded 17%.

CTA

CTAs likely benefitted from short positions in Fixed Income and Equities, but generally lost in Commodities that produced whipsaw losses. Short-ish exposure to bonds has been a mainstay allocation for CTAs over the year. Equities have been a somewhat more variable allocation. Indicative exposure can be analyzed using our Correlation Tracker.

Crypto Strategies

For Crypto Managers, there is a stark contrast between the BTC and the so-called AltCoins. According to an analysis done by Runa Digital Assets, at the end of Q3-2023, only 6% of the AltCoins have outperformed BitCoin in the current cycle.

The effect of this is that most Crypto Managers have failed to deliver results on par with BTC. They typically hold more diversified portfolios. In prior bull market cycles AltCoins has generally produced positive returns. In this cycle AltCoins are negative. This is somewhat similar to the issues suffered by Large Cap Equity Managers who seem to struggle when only a few companies provide the bulk of the returns.

Equity Market Neutral

EMN strategies tend to do better in higher interest rate environments, but we have also seen dispersion increase across equity market sectors. This tends to be beneficial to managers engaging in Value and Momentum factors as there is a larger divergence between companies with good or bad fundamentals.

Using historical data for the recently launched Cboe S&P 500 Dispersion Index, we note that the average dispersion has shifted higher post-Covid, especially after the FED started to increase rates. This is believed to be a contributing factor to strong Equity Market Neutral performance.

If you have a few minutes to spare, feel free to watch my conversation with the duo (Rich and Simon) behind the Algorithmic Advantage.

Please join our weekly mailing list and do not hesitate to reach out to us if we can help you with data and analytics.

I had the opportunity to chat with the dynamic duo behind the Algorithmic Advantage podcast. We spoke mainly about various topics, including the database, the Serenity ratio, managers, the pain arbitrage that trend-followers represent, and the do-it-yourself solution that NilssonHedge is offering for monitoring and analyzing managers. And how should think when you are trying to benchmark your results.

This is a podcast that you should definitively follow. I mostly listen to these through iTunes, but they are also available on Spotify or YouTube. Rich and Simon are two truly remarkable traders, but also podcasters.

The two hosts, Rich and Simon, are two quant trading veterans, something that they cover in their first two (first, second) episodes.

And on a side note, they got much better content with actual traders and professional quants. Art Holly is a long-term colleague of mine and the Takahe Capital is offering an exciting take on Trend Following.

The Art Holly Interview: https://www.youtube.com/watch?v=L6QGJqfQ2Gw

The Two Quants: https://www.youtube.com/watch?v=KpoMmH_1kM0

The time has come for our monthly performance update. For Trend-following strategies, September 2023 was a strong month and brought many managers back to positive numbers for the year. With close to 90% of the managers reporting data for September, we can now provide a near-definitive list of the best and worst-performing strategies for September 2023.

Feel free to explore the additional ranking lists through he links provided below.

 

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided. 

Market Neutral

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here. 

Equity Long/Short

To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

Crypto

To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

We should have done this long ago, improving the granularity of our Crypto Hedge Fund Indices and our classification for those managers.

The goal of this exercise is to be able to better benchmark and compare managers within this nascent space. We have thus split the Crypto-verse into four different sub-classifications:

• Digital Asset Allocator – The equivalent of the Asset Allocator, trying to find the Coins offering the best “long-only” portfolio. They are expected to be structurally correlated to the various long-only indices available and have a similar level of volatility. Occasionally they may include stable coins if the outlooks is considerably bearish. Given the history of Digital Assets, this is the largest group.
• Crypto Long/Short – The equivalent of the Equity Long/Short Strategies, managers that are partially trying to hedge exposure, while having a significant correlation to Digital Assets. This category does to some extent overlap with the Digital Asset Allocator group.
• Market Neutral – DeFi Yield and Basis Trading strategies end up in the category. Statistical arbitrage strategies cross-trading several coins based on mathematical relationships also end up here. High-frequency trading with modest correlation will also end up in this classification. This is generally the group that is growing the fastest
• Index – Strategies that are established to provide close to 1-1 correlation with one of the digital Tokens. These are typically ETF-like structures (yes, they exist outside the US).

There is also a smaller Venture category, but this is too small to be noteworthy, as most of our managers are focused on (mostly) liquid coins.

As this group is established post-hoc, we have applied statistical filters, language models, and “common sense” to establish the groups. There may be mistakes and we will gradually sort them out as we apply further checks.

To judge the pace and development of each sub-group we study the number of unique data points. As we are interested in the growth pace, we use logarithmic graphs. Here we note the acceleration of the Digital Asset Allocator group throughout 2021, which has now slowed down considerably. Long/Short and Market Neutral strategies are growing at a fairly steady pace.

We have also created three additional Crypto Indices, which are available through the Member Library. Shortly, we will add these sub-indices to our index page and you can view them in parallel to our regular Crypto Index.

The broad Crypto index and the more specific Digital Asset Allocator have large similarities. The Crypto Long Short has lower volatility but is dependent on the beta. The Market Neutral Index has little beta. The impact of FTX can be seen.

The classification is available to our database subscribers.

Much is pointing in the direction that CTAs had a strong September, with a preliminary estimated return of 2.6%. The fourth quarter is typically a strong period, and we may potentially hope for some strong performance here.

Here CTAs did what they were expected to do. provide offsetting returns to challenged equity markets. It is a narrative that does not always hold but it is good to see that the strategy is able to pick up uncorrelated returns as the FED infused some pessimism.

Market Neutral strategies are a close second, and here we see solid and uncorrelated returns from a strategy that has made a comeback since 2020. The disappointing returns from value and investors’ exit have given the strategy room to create positive returns. Of course, the changes in the FED stance have also helped a lot.

The short bond trade was the gift that kept giving. Bonds continued to trade down as the FOMC reinforced the message that they kept rates higher for longer. Using our statistical decomposition of CTA returns, we infer they are lightly exposed to equity risk, modest short bonds, and the shortish the USD. The most significant recent change is the increasing Energy position. Crude and distillates continued to trade higher and Trend Followers followed the trend.

Doing the same for the star performer of the year, outpacing their brethren in Long/Short Equity by a smidgen are the Market Neutral managers. Here we note while there is some occasional correlation to various global markets, the overall beta is near zero in almost all markets.

After a few disappointing months, Crypto strategies seem to have a relatively calm month, with a modest positive number. Most of the gains that we saw in the early part of the year have melted away.

This update is based on data as of Thursday the 28th. With one trading day left, results might have changed when we look at the final result. Feel free to join our email list if you want to stay updated on aggregated performance and various other topics relating to CTA and Hedge Funds.

After a few weeks of longer content, we revert back to our normal programming. Somewhat shorter content, and more focused on the actual Data in the Database. With more than 80% of the managers reporting data for August 2023, we can now highlight the top 5 and bottom 5 results. Below we summarize the best and the worst performing strategies across each strategy.

To sign up, simply visit our website and provide us with your email address. We promise not to spam you or share your information with third parties, and you can unsubscribe at any time. Don’t miss out on this valuable opportunity to stay ahead of the curve in the ever-changing world of finance.

CTA

It is worth noting that while the general Commodity Trading Advisor (CTA) industry tends to be trend-driven, there are always outliers that are driven by specific markets or market effects. This can make for a high degree of dispersion among the best and worst-performing funds within a given category, but it can also provide valuable insights into how different strategies react to different market developments.

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided. 

Market Neutral

Market Neutral is a popular strategy among investors due to its low volatility and steady returns over time. Unlike other strategies that may produce large gains or losses in a short period, Market Neutral tends to accumulate returns gradually over time. This makes it an attractive option for those looking to achieve steady, long-term growth without taking on excessive risk.

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here. 

Equity Long/Short

Equity Long/Short strategies are investment approaches that involve taking both long and short positions in equities in order to potentially profit from the performance of individual stocks or the broader equity markets. 

 

To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

Event-Driven managers are commonly exposed to various arbitrage/spread risks related to specialist situations securities. Managers with concentrated exposure tend to end up on this list and exploring the drivers of out or underperformance may yield insights.

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

Similar to Equity Long/Short managers, Fixed Income managers are typically influenced by the underlying market conditions. However, for this list, the focus is on managers who are sensitive to a specific subsector of the Fixed Income market, particularly those engaged in the lowest part of the capital structure.

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

Risk Premia managers are commonly implemented well explored and researched systematic strategies. These may be viewed as a general proxy for Hedge Fund exposure. Performance of specific factors may reveal differences and similarities to your own portfolio. To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

Crypto markets have recently seen reduced volatility, but that has not stopped particular managers from showing high return variability. Returns tend to be double-digit (or even triple-digit for the best funds), simply due to the volatility of the asset class. To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

This is an article that NilssonHedge co-wrote with Dan Rizzuto, and which first appeared in Hedge Nordic’s commodity special.

Prior to Covid, Commodity Hedge Funds and the non-financial exposures of more diversified Global Macro portfolios may have been seen as a lost cause to many.  Assets allocated to Commodity Trading Advisors and Hedge Funds specialized in these markets dwindled, while fully diversified managers reconsidered their weightings at the expense of Commodities in an effort to replace the hollow returns of the sector. Several high-profile managers, old and new, closed as the interest in Commodity strategies shrunk due to lackluster performance. Surging interest in public and private equity, alternative credit, and cryptocurrencies readily filled the void for risk-seeking capital as Commodities fell out of favor during this time. 

Much of this changed though during and following the 2020 Pandemic. Commodity markets were suddenly back to their old selves, and then some.  Almost forgotten volatility, sustained trends, and a renewed focus on tight supply and uncertain demand brought the Commodity sector’s favored idiosyncratic fundamentals roaring back into focus. 

Following the lockdowns and historic fiscal and monetary accommodation, inflation was back in the limelight too, with both retail and institutional interest generating inflows and higher prices for broad Commodity indices and specific Commodities. An asset class with a debated risk premium was back in vogue, and seemingly “back to normal”. 

Beyond the “good old days” factor, newer elements to the Commodity sector introduced other opportunities.  Energy transition, a re-start of regulatory, voluntary carbon emission investments, an assertive Global South, de-globalization, and the green transition each added to a re-invigorated and shifting Commodity sector.

Commodity investing has historically been pursued primarily for its absolute returns and its lack of correlation, offering better risk-adjusted results when included in a portfolio of financial investments like stocks and bonds.  While long-biased Commodity indices created investment opportunities for asset allocators, the Commodity sector has also given rise to an associated interesting and uncorrelated opportunity set for long/short Commodity strategies that try to arbitrage dislocations and temporary anomalies. 

Though history shows that investor appetite in these markets can be fickle, and enthusiasm can wax and wane, a global transition economy and all its concomitant frictions suggest a fundamental tailwind for sector specialists and other opportunistic strategies trading Commodities.

The Resurgence of the Active Commodity Trader

Since 2019, specialized active traders in the Agricultural, Metals, Energy, and related markets have been able to capitalize on the volatility, trends, and forced trading in this niche CTA space. 

While Commodities have always been a macro market, driven by broad global phenomena plus sector-specific supply and demand, in more recent years it became evident that the micro-structure of these markets can matter a lot! Knowing the differences between seemingly similar markets, the interconnectivity of physical and derivative markets, and the real logistics/commercial considerations of the underlying industries turned out to be crucial. 

The unprecedented circumstances around the negative pricing of the WTI Crude Oil contract during the panicky markets in March 2020 are the prime example. Awareness of contract specifications and that WTI is only delivered at a particularly constrained delivery point, while the almost equivalent Brent Crude Oil contract offers much more optionality when it comes to delivery was pivotal. 

Similarly, the supply side of the market has created previously unseen volatility levels. And, the near implosion of the LME on the back of the Nickel price surge in March 2022 is an example that some exchanges offered better or worse transparency when it comes to arrangements specific producers had with their banks. 

Perhaps most importantly, a decade-plus of monetary accommodation across the globe, and in particular Western economies, has finally come to an end, with a five-fold increase in interest rates in the United States in about a year with other Central Banks following suit.  Similarly, the coordinated Central Bank efforts to manage capital market valuations and to keep interest rates low shifted rapidly to inflation fighting and attempts to centrally manage domestic economies. 

And finally, as a bonus, post the crash in 2020, retail and institutional buyers started to accumulate long positions in listed Commodity ETFs. These were predominately price-insensitive buyers and cared little for (and understood less about) the micro-structure of the market. These “Commodity Tourists” have only a fleeting interest in the underlying mechanics of the market but rather seek exposure for fear of missing out. This “FOMO”, while costly for many, can be a bonanza for professional managers that seek to arbitrage curve prices, temporary supply and demand imbalances, and flow-driven anomalies.  (As the inflation theme and Commodity prices have moderated in 2022/23 these investors have predictably started to reduce their exposures.) 

When we are looking at the most well-known CTA strategy, globally diversified trend following, they are overwhelmingly dominated by Systematic strategies, almost 100% of managers are using a trading approach that is focused on trying to extract value from opportunities that are persistent and can be formulated as an algorithm. 

The Commodity Specialist peer group exhibits a much more balanced mix of Discretionary and Systematic trading approaches. Discretionary managers often have a background on the physical side of the business and come with deep specialized experience. Systematic Commodity specialists are commonly deploying highly specific models that try to capture the dynamic nature of a handful of markets.

The Trend Following manager is on average five times larger than their specialized Commodity peers. Commodity managers have slightly better risk-adjusted returns, which may be offset by less strong performance during equity market stress periods or lower skew. Commodity alpha managers also tend to be uncorrelated to each other, whereas Trend Following managers are relatively highly correlated to each other. 

A diversified basket of strategies

All of these opportunities created a favorable situation for funds that had a specialized skill set to analyze and trade Commodities. Across all the different Hedge Fund indices that we calculate, the Discretionary Commodity Index had by far the most efficient returns (closely followed by a mix of Systematic and Discretionary Commodity strategies). 

Since 2019, the Sharpe Ratio for a combined portfolio consisting of a diversified basket of active long/short Commodity specialists is above two, whereas the other indices within liquid alternatives typically have a Sharpe ratio of one or lower. The Discretionary managers are a subset of the CTA universe, that is structurally different from the pre-dominantly diversified and Systematic programs that have come to be the primary investment strategy for institutional investors seeking tail protection and trend exposure. 

Considerations for Investors

While helping, a Commodity “super cycle” is likely not enough rationale for re-entering or increasing exposure to the sector through a long-biased approach.  Fortunately, there does appear to be a resurgence of conditions (e.g. trends, mean reversion, volatility) to allow the premias offered by actively trading the sector to deliver upside and diversification for several years to come.  Most notably, we suggest de-globalization and the retreat of coordinated Central Bank manipulation will play out to the advantage of active Commodity exposure.  

Active Commodity trading is a specialized sub-strategy with comparatively limited scalability.  Most managers have limited capacity and operate on a smaller AUM basis. Investors committed to the sector will most likely need to be more diversified across portfolio managers and perhaps use smaller managers. On the plus side, the specialization required of newer markets including environmental and rare earth elements will likely give active management, and perhaps Discretionary specialists, in particular, a leg up on their Systematic and globally diversified peers. Newer markets can offer opportunities (and risk) to the nimbler trading methods. 

Across this backdrop of enthusiasm are some warning signs though.  We point to the limited capacity of some of these markets, strategies, and managers.  Though diversification and enhanced returns may be present, is there enough market depth to support full institutional allocations?  

We conclude with the opportunistic view that today’s capacity for technological innovation is unprecedented and that capital markets innovation has throughout history offered elegant solutions to constraints that were seemingly insurmountable only a few years prior.  And with that, we believe active Commodity trading may indeed renew its tenured position as an uncorrelated investment with attractive risk/reward trade-offs too attractive to ignore.

This article was written by Linus Nilsson and Dan Rizzuto and appeared first in the Hedge Nordic commodity special. We would like to thank Kamran Ghalitschi and Eugeniu Guzun at Hedge Nordic and congratulate them on running an excellent publication with a focus on Hedge Funds in the Nordic area.

Global Investment Report’s survey of the Top 50 hedge funds is unique industry research. This year is the 20th edition of the survey, which previously has been featured in The Wall Street Journal, Barron’s, FinancialTimes, and Institutional Investor. An exceptional feature of the annual survey: it then tracks the subsequent performance of the select 50 funds while discussing evolving industry trends.  

No question I was surprised to see the anemic first-half performance of the 50 most consistent broad-strategy funds, which were up an average of just 1.1%. They trailed the market by 15 percentage points. The main reason: these managers didn’t buy into the rally.

While that performance gap was uncharacteristically large, consistent funds will always trail a bull market, normally delivering decent absolute returns during such times. That’s in their DNA. They prove their medium and long-term advantage by outpacing markets when they turn bearish. We’ll need to see what the rest of the year brings to discern whether these managers were prescient or just wrong about the market.

On the slightly positive side, two-thirds of the group was up, generating average returns of 4.6%. Emerging market and arbitrage funds were the top performers with gains of more than 6%.

The 10 Top 50 funds that are multistrategy delivered modest first-half returns, gaining just 2.4%. The average multistrat, according to BarclayHedge, gained less than 1% during the same time.

Without having access to actual portfolios, we can’t pinpoint the precise reasons why these funds drastically trailed the market. Piecing together what various sources (including managers) told me, it’s pretty clear multistrategy managers, like the rest of the industry, remained cautious.

This posture had served them exceedingly well in 2022. Last year’s multistrategy funds that made the Top 50 (the same managers that comprised this year’s list) delivered gains of more than 10%. That was 28 percentage points better than the market.

With a huge equity market performance swing between last year and this year, very few managers will excel over both periods. It just isn’t possible, which largely explains the performance dichotomy we’re seeing. Pundits and journalists are generally near-term focused and don’t report this larger picture. 

To your point about added expenses holding back returns, let’s look at the top 3 multistrategy funds on the Top 50 list. Third-ranked Citadel Wellington led the pack up 7.15%; 11^th-ranked DE Shaw Composite rose 4.26%; and 19^th-ranked Millennium was up just 2.84%. Higher fees and costs alone can’t explain this significant underperformance compared to the market.

The FT article you cited discussed several distinct trends in multistrategy investing. Two things stood out. 

Goldman Sach found that while the strategy holds only 8% of hedge fund assets, they account for 27% of the industry’s exposure —the difference being leverage. The group also represents more than one-quarter of the industry’s headcount. Ken Griffin’s takeaway is likely spot on: “Clearly right now multistrategy managers are very much in vogue. When you’re most popular is probably when you’re reaching the top of the cycle.” These observations suggest two unfavorable trends: rising costs and a strategy potentially running out of capacity. But the latter doesn’t occur overnight. It could simply mean, like most other hedge fund strategies, they’ve made a conscious choice not to partake in the market rally.

You point to the conundrum facing every manager: follow the crowd or mind the gap you cited? Even some of the most bearish managers are probably considering rotating toward some middle ground. Patrick Ghali, a managing partner at the consultancy Sussex Partners, told me: “It’s unclear whether (his favorite managers) are behind the market or well ahead of the volatility that’s to come.” His firm has since rotated from its zero-equity position towards a 20% exposure. But that exposure is in idiosyncratic small- and mid-cap stocks involving short-term, lower-risk trades. That sounds like a reasonable compromise.

Let’s take a slightly longer-term view of how managers address risk. In early 2020 when we’re facing economies shutting down with little clarity about how profound the pandemic would be, managers held their ground and enjoyed the second-half rally.

This year, fearing the impact of interest rates returning to normal levels, managers felt the sky would be falling. Maybe they relied on the historical record of market performance when rates rose. In contrast, there was no precedence to inform the fallout of the pandemic—which to me looked like a far greater risk.

I don’t think that was a primary cause of macro managers’ struggles. Let’s look back over the past 18 months.

Last year was set to see strong macro trends, which likely made it easier for macro managers to pile into certain trades. Having been recklessly slow to move rates from ultra-low Covid-emergency levels after the pandemic had clearly eased, central banks were forced to play catch up.

Rose-colored thinking in the middle of last year suggested a pivot toward rate cutting was in the offing. No way was that going to happen. Being roundly criticized for their complacency, central banks needed to be seen as hawkish to reestablish their credibility. Even now, this likely means they won’t be taking steps to preempt recession.

In addition to attractive bond shorts, strong monetary trends set up more robust currency trading opportunities than we have seen in quite some time.

Last year’s stock market slide was also fairly predictable. Remember, we had a monster 4Q21 rally (in the US) that made no sense with inflation taking off, soaring energy costs, extant supply chain issues, the pandemic still with us, and Russia poised for war. There were many good reasons for having been short stock indices.

But in 2023, the only definitive trend is one that many managers didn’t trust—rising equities. So perhaps it’s not particularly surprising to see macro and managed futures struggle.

Remember, to qualify for The Top 50, a manager needs to show consistent absolute returns over the trailing five years. So, if a fund has an off year, it will take some time for it to again qualify for inclusion.

But your point about past winners going south: absolutely. And they are predictable. I caution readers each year especially about the highest-ranked funds. And that prediction is hardly neuroscience. Whenever funds generate 25%+ annualized returns for the trailing five years, that’s a run that’s very hard to sustain regardless of market conditions.

I’ll provide several examples from my past three surveys.

Sosin Partners is a small, high-conviction, concentrated equity long-bias fund who saw risk management primarily in its long stock selection. It didn’t really hedge. The fund took the top spot in the 2020 survey with 5-year annualized returns of more than 31% through 2019. Then in 2020, it gained more than 96%. One of its core holdings—Carvana—benefitted hugely from the pandemic. This boosted its trailing 5-year trailing annualized returns to more than 46%, helping the fund to easily retain the No. 1 ranking.

While the market climbed nearly 29% in 2021, Sosin ended the year up just 3.9%. That was below the minimum hurdle to qualify for the 2022 Top 50 list. Despite its companies’ changing fortunes, the manager maintained his holdings and long bias.

Sosin collapsed by -77% in 2022.

That same year was the first time Skye Global qualified for the survey. It had just passed the survey’s minimum of five years in business with eye-popping trailing returns of nearly 50%. The hedged equity fund had become a Wall Street darling with record capital raising that helped boost assets to more than $5 billion. 

But Skye Global lost more than –47% in 2022.

This year’s 2023 survey was led by global macro manager Haidar Jupiter. This consistently performing fund has been around for more than 23 years. But over the previous two years, manager Said Haidar had clearly became more aggressive, pushing up leverage and making large one-sided investments that helped it generate annual returns of 70% in 2021 and then 193% in 2022. This produced 5-year trailing numbers through 2022 of 55%. 

It then lost nearly -30% during the first half of 2023. But the fund had been struggling since the end of 3Q22, having lost -29% in the final quarter of 2022.

Consistency doesn’t guarantee future performance. But as a rule, the most reliable managers generate annual returns that tend to be range-bound between high single-digits and low double-digits. They stay true to a disciplined, repeatable investment process which gives them a greater chance of generating similar forward returns—regardless of strategy and market conditions.

Thanks Eric, it is always great to get your views. Click here to explore the Global Investment Report or here to read the latest H1-2023 edition.

Photo credit: Carin Drechsler-Marx

Based on our daily indices, August likely saw positive returns for Event-Driven (+0.8%) and Market Neutral (+1.2%) strategies. Equity Long/Short lost 1.0% and CTAs struggled to find profitable trends, recording a decline of 0.9%. Event-driven and market-neutral strategies performed well in a relatively uneventful August, dominated by low market volumes and a lack of significant market-moving drivers. Despite positive developments on the ETF side for Crypto Managers, the NilssonHedge Crypto Index noted a loss of 12.3%. This was the largest loss year-to-date for our index.

In a year that has been dominated by strong equity market trends, L/S Equity has performed well, as expected. Factor portfolios continue to deliver slow and steady returns, mainly due to a lack of value returns. For CTAs, there seems to be a struggle between longer-term trends that do not align with shorter-term moves.

Other significant market developments were:

• August was a month with modest risk-off drivers. We saw the first equity market decline (the S&P 500 and the Nasdaq were negative) since February 2023 and US yields continued to climb higher.
• During the annual Central Bank gathering in Jackson Hole, the Fed confirmed that they would be “data dependent”, but was leaning towards either holding steady or tightening further.
• The odds of seeing further rate hikes decreased, and the Fed Fund market sees a probability of 40% for a rate hike into the year-end.
• China’s equity market declined, reflecting a slowdown in the economy and several European countries entered recessions.

Short Term Trading is one of the elusive trading strategies within Managed Futures. Often managers have been able to deliver uncorrelated historical returns. Once the manager grows above a certain limit or becomes known to the investment community, the future results tend to be underwhelming as capacity constraints and alpha decay start to bite.

Our friends at TwoQuants recently showcased a creative way to use Hedge Fund Return data. Here, we show a different way to use it, a potential way to indicate capacity constraints (or alpha decay).

One of the longest-running short-term indices is the SocGen Short Term Traders index which consists of the largest short-term Managed Futures managers. This index has lagged behind the broader SG CTA Index (there are some overlapping names) and is highly correlated (0.6) to the CTA Index. To some extent, it looks like a strategy group that has half the upside of the CTA but similar drawdowns. Overall, investing in a group of large short-term traders has been a disappointing exercise and the return has lagged trend following strategies.

The NilssonHedge Short Term Index has similar performance characteristics compared to the SG index. We started the index in 2019, so the optics of our index are a bit better, but the returns are largely the same when adjusting for the period. Time will tell if the smaller managers in our index can contribute to stronger long-term performance.

Managing capacity is one of the most difficult issues for short-term traders. Some of the issues are not always in the control of the managers themselves. To name a few:

• Assets under management – the more aum, the harder it is to extract the same alpha per trade. Slippage will increase and some trades have an inherent counterparty that has a specific budget to spend on trades or may change behavior if it is too costly to execute.
• In general, a short-term trader needs to size positions larger than a longer-term trader. To state the obvious, short-term strategies also trade more often. This will reduce capacity faster than for longer-term strategies.
• Volatility – higher volatility allows for smaller position sizing, all else equal, which will result in more opportunities for traders. Higher volatility usually results in more forced trading which creates opportunities for both trend and mean reversion.
• Crowding – several investment banks have commoditized common short-term strategies, for instance, intraday momentum can be bought in swap format. That will reduce the available returns for short-term managers who are engaged in intraday momentum strategies.
• And of course, alpha decay. A difficult-to-assess metric that usually coincides with declining returns for a particular investment thesis.

So, what can you as an investor do? This short post will show a quick way to estimate capacity. There are more complicated ways, and for more serious treatment, you should adjust for the overall market opportunity and only look at the excess returns for a particular strategy compared to their peers.

One naive way to quickly estimate capacity is to regress assets under management against the realized Sharpe ratio. We do so for a few short-term managers and some of them show a strong sensitivity to increased assets. We use (natural) logged assets under management and one unit change is roughly a doubling of aum.

Each of the four managers has unique and different trading styles and different sensitivities to market conditions and assets.

• Manager #1 A manager depending on a few select strategies, using AI and Fundamental data, seems to have a capacity constraint. Here an investor would require more due diligence to figure out the trading strategy and how it develops.
• Manager #2 A short-term manager with a high trend correlation, this manager only seems to have a modest capacity dependency. The decline is largely explained by lower efficiency for Trend Following over this period, a sub-strategy for the manager.
• Manager #3 is a diversified short-term trader, with multiple portfolio managers. Here capacity seems to be well managed and there is no clear dependency.
• Manager #4 is a short-term equity-focused manager. The strategy is probably capacity-constrained but is also more environmentally dependent as it only trades one market sector.

Feel free to join our email list if you found this useful. We intend to get back to a deeper dive into short-term strategies in a later post.

Based on the most recent return data that we have available, we can provide a comprehensive overview of the top-performing and bottom-performing strategies for each category, taking into account both monthly and yearly results. Our analysis is based on proprietary composite data streams that we have compiled, but we must note that there is always the possibility of errors or inaccuracies in our calculations.

In particular, we observed that Event-Driven Strategies had a really good month, as the worst manager in the category only lost 0.1% and this was the only manager with a negative return.

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided. 

Market Neutral

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here. 

Equity Long/Short

To explore our extensive Equity Long/Short-list, with dynamic rankings, please see this Link

Event Driven

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

 

To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

In this exploration, we study the difference between the Sharpe and the Sortino ratio. These two popular ratios are often used in factsheets or when discussing managers. In the end, we find that the choice is largely irrelevant. If you have a favorite ratio, now is the time to revise that belief.

With regard to performance ratios, some investors strongly believe in one type of measurement over the other. One example of a debate that is occasionally ongoing is the difference between the Sharpe and Sortino ratios. A plethora of other ratios exist, but most performance-based ratios use some variation of return over risk.

A few years ago there was a discussion on how the Sortino ratio would be more suitable to “properly” rank strategies with a positive skew, such as CTAs against other strategies. For the Sortino ratio, there is more than one way to calculate the denominator, using the Target Downside Deviation or the Semi Standard Deviation (or Lower partial standard deviation).

Sharpe & Sortino

As we will demonstrate, the choice between these two ratios is largely irrelevant. From an input perspective, these ratios consume the same type of data, and while the Sortino ratio is focused on the downside, it is the same data set. The incremental information is small and the Sortino only looks at approximately half the sample. Unless you have long time series, the Sortino ratio is less information-dense and by definition less significant.

For the nominator, we use geometric (compounded annualized) returns, even though arithmetic returns may be better as the compounded return is affected by the volatility level.

To illustrate the lack of difference, we calculate the Sharpe and Sortino Ratios across all currently reporting managers in the database. For the Sortino, we also calculate two variations, one using the Semi Standard Deviation (ignoring positive returns) and one using the Target downside deviation (replacing positive return with zeros).

Type	Rank Correlation (Sharpe – Sortino Standard)
All	0.93
CTA	0.93
Crypto	0.94
Equity LS	0.96
Market Neutral	0.97

From the table above, we observe that the measures are highly correlated while simultaneously noting that we have not adjusted for the length of the track records, and some of the outliers are due to (very) short track records. Adjusting for that, the measure would align even more. That is an exercise that we leave for the interested reader.

With one of the most data-dense charts we have made, we plot the ranks by Sharpe and Sortino and compare them to each other across more than 2,000 funds. Visually, we can confirm that the ranking is highly correlated. The outliers tend to be for track-record with “special” features, typically short track-record with an insufficient number of observations. What is perhaps interesting is one type of strategy does not have a materially different outcome depending on the ranking measure.

From a visual perspective when only looking at the CTA subset, the message is the same. Highly correlated observations. We could have imagined that one type of strategy would always have a better ranking if it was say persistently positively skewed.

The off-the-line observations are managers with short track records or managers using option strategies (that would rank high on Sharpe, but not Sortino post an event) and potentially simulated returns without any significant downside.

Two different formulations of the Sortino

As our last experiment on the difference between the ratios, we run the two different formulations of the denominator for the Sortino Ratio for CTAs. While we note one or two outliers, an overwhelming majority of the observations fall on the linear regression line.

So, when ranking strategies by any performance ratio, most measures will arrive at the same relative result. The top-ranked managers will differ slightly, but within the top 10-20 names they are mostly the same names. You cannot catapult yourself into a better ranking by picking a particular (standardized) performance ratio.

Skews for Hedge Fund Strategies

CTAs do have a more positive skew compared to other strategies, but using the Sortino over the Sharpe ratio to tease out that difference seems to be the wrong tool. We note that Crypto managers have an even larger positive skew, but that is largely due to the time period over which the measure is calculated.

Strategy	Monthly Skew
Asset allocation	-0.58
Crypto	0.74
CTA	0.33
Equity LS	-0.12
Event Driven	-0.83
Fixed Income	-1.21
Hedge Fund	-0.61
Market Neutral	-0.33
RiskPremia	-0.36

As our final note, we also calculate the skew by CTA trading style. Tail Protect strategies rank the best, i.e. large positive outliers with smaller negative returns. Surprisingly Trend Following strategies are in the lower half of the sample. Short Term strategies do for instance rank better.

Final words

In summary, the ratio selected does not matter. You are using the same dataset, sliced and diced somewhat differently. In our opinion, the Sharpe ratio is most likely the more intuitive as it uses the whole data set and provides a quick relationship between (historical) returns and risk.

We hope you enjoyed this exploration of the Sharpe, Sortino, and the Skew for a wide variety of Hedge Fund strategies. If you did, please feel free to subscribe or forward this to a colleague.

As we are still relatively early in gathering data for July, we thought it would be prudent to give you an update on how the database is continuing to grow as we are capturing more and more strategies. If you are a member you can get a glimpse of current returns here.

Nilsson Hedge provides an extensive CTA/Managed Futures and Hedge Fund database. The majority of the database covers CTA or Managed Futures Managers, using a variety of styles and strategies. In addition, NilssonHedge offers supplemental coverage of a number of Long/Short Equity Managers, Fixed Income Strategies, and Multi-Strategy hedge funds.

We have recently passed a milestone and our database now contains half a million return estimates. For anyone doing research on Hedge Funds, and especially CTAs, this is a unique, cost-efficient data source. In total, the database contains 41,936 years of manager return data. In many cases, we have programs that are not present in other databases and have a tendency to capture emerging managers faster.

• The Database contains 3197 different management entities, representing 6568 different investment strategies. We use more than twelve thousand return streams to verify quality and aggregate returns.

• For the current reporting month, 938 managers have reported returns.
• For the prior month, we have 2068 live managers. In terms of CTAs, for the current reporting month, 225 CTA programs have reported returns. For the preceding month, we have 643 live programs.
• Over the last three calendar months, we have added 625 new strategies to the database.

For historical reasons, our focus has been on Macro and CTA strategies, but we are working on extending coverage for other strategies. UCITS,40-act, and other listed funds are a true blessing as they offer high transparency. Please feel free to reach out if you have a need for a new data source. We offer free sample data and can arrange for one-off access.

As July is coming to a close (one trading day left as of pixel-time), we note that CTAs look to have had a small losing month (-0.5%). Managed Futures managers are likely to have printed a negative month, despite a fairly strong recovery into the end of the month, post the FOMC meeting.

Given the relatively small loss, there will be some dispersion around the mean, which will be attributed a high significance as some managers may have gained due to skill and others have lost due to bad luck. In a month like July, with significant reversals, most of the dispersion is likely explained by luck. Time horizon and prior fixed income exposure will likely also have driven the profit and loss. These are static design decisions and will affect the long-term performance but not drive any short-term skill-based results.

Our other strategy trackers look to have printed a positive month, driven by strong equity market developments. Equity Long/Short is motoring on and is the best strategy year-to-date. Equity markets are no longer expecting a hard landing and were lifted by the increased prospect that we are close to the end of the FED hiking cycle.

The most significant market developments in July 2023 and their impact on markets can be summarized as follows:

1. Potentially last rate hike: Interest rate futures indicated that the market largely priced in another rate hike by the Federal Open Market Committee (FOMC) at its July 25-26 meeting. This expectation reflected the ongoing tightening cycle and signaled the committee’s intent to address inflationary concerns. The anticipation of higher interest rates likely influenced investor sentiment and market pricing. The CME Fed Watch Tool indicates that the market is only pricing in a modest chance of another rate hike.
2. Market focus on FOMC decision and subsequent news conference: Market participants closely monitored the FOMC’s decision on interest rates, with the 25 basis-point hike widely expected. The focus then shifted to the subsequent news conference for any insights into the committee’s future monetary policy direction.
3. Range-bound U.S. dollar: Continued signs of a resilient U.S. economy supported the U.S. dollar, which had recently rebounded from a 15-month low. The prospect of further interest rate increases by the FOMC contributed to the dollar’s strength. A stronger dollar can affect various markets and sectors, such as commodities, emerging economies, and global trade, due to its impact on currency exchange rates. This drove a large number of price reveals throughout the month. In particular Oil markets staggered a strong comeback.
4. Impact on other currencies: The rate hike and dollar strength had implications for other currencies. For instance, the Australian dollar and Singapore dollar weakened, after what was perceived as the FOMC’s last rate hike.
5. Earnings reports and market stabilization: The earnings season began, with notable reports from companies like Microsoft. The VIX Index is now back in the low teens, and everything is calm again.

To follow index development and to download our free index data, we can recommend the “Member Library“. This allows you to further study and analyze Hedge Fund performance data. This page is under development and will allow you to get quick access to updated performance data. You are no longer required to go through our store to access the data which should be an improvement for everyone.

The Member Library

Global Investment Report’s survey of the Top 50 hedge funds is unique industry research. This year is the 20th edition of the survey, which previously has been featured in The Wall Street Journal, Barron’s, FinancialTimes, and Institutional Investor.

We had the opportunity to sit down with the survey’s manager Eric Uhlfelder and quiz him about his findings and how he devises his ranking of the industry’s most consistently performing hedge funds. If you want to skip the fireside chat I had with Eric, please feel free to jump directly to a copy of his report at Global Investment Report.

Eric follows a broader range of strategies than what we do, and the perspective of the larger funds is inspiring and adds context to an industry that struggles with performance and perception. The 20th edition of the report spans a large number of topics, ranging from the expected (the survey of the 50 most consistently performing funds) to the unexpected (an interview with the former US Ambassador to Russia).

• There are several minimum thresholds that funds must meet to be considered. Now that I’ve applied these standards for five consecutive years, this approach is revealing the most consistently performing managers.  That’s further borne out with more than two-thirds of the Top 50 funds regularly qualifying for the subsequent year’s survey. Here are the basic minimum requirements. 

• The idea of flexible multistrategy funds seems to be an interesting all-weather investment solution.  But on average, they aren’t doing particularly well.  According to BarclayHedge, the average multistrategy fund lost 3% last year and over the trailing 5 years through 2022, returned only 2.2%. So all the rage about the strategy really involves a select group of outliers, like Citadel Wellington (ranked No. 3) and D. E. Shaw Composite (No. 14). 
• Both did very well last year and delivered 5-year trailing annualized returns of 23% and 15.4%, respectively.  Their underlying success is based on their manager and strategy selection and weighting. These folks are certainly proving more successful than the fund-of-funds model. That said, a single strategy manager is much easier to break down and discern what’s driving exposure, risk, and returns.  That transparency is always helpful, especially if you’re doing your own homework. 
• Your question about sustainability, especially with the most successful funds, is on everyone’s mind.  The concerns I hear from large allocators: they’re increasingly worried about growing use of leverage, rising fees and pass-through expenses, and internal opacity.  I’m worried about managements’ belief in limitless capacity.  That’s counter-intuitive to what my research has found over the years. The larger a fund gets, the more limited are its investment opportunities, and then this can lead to more risky decision making to find a new edge. 
• Searching for great returns certainly might explain growing use of leverage.  But that’s conjecture. It’s also hard to identify performance drivers of such complex portfolios. Then, with internal manager compensation often linked to how much of the pie a manager is running, then there’s the issue of keeping all of the team happy, something maybe akin to herding cats.  But my largest concern about the very biggest funds that are delivering extraordinary returns year after year, it feels like musical chairs.  Regardless of whatever assurance management provides, the music always stops.  And no one can predict when that will happen.  

• Thanks.  I guess perseverance is key.  The longer you research an industry, the more you learn, and the more key industry figures begin to trust and open up to you.  Like fund management itself, it’s all about sticking to a process.  But then something else happens . . . you start to see links between manager, strategy, and performance . . . and when you see deviations that don’t make sense, you know the questions that really need to be answered to help understand what’s going on.
• But I’ll be the first to say, I still feel like I’m often just scratching the surface.  I can combine facts and reverse engineer an ostensible explanation of what I’m seeing.  But it’s not the same as being in the engine room and seeing firsthand what’s driving behavior and performance.  And there’s the rub.  There will always be uncertainty when investing in hedge funds along with most other alternative vehicles.  

• The biggest challenge: most journalists write negatively about the industry.  There’s an abundance of schadenfreude going on. A key reason for it: the majority of hedge funds are not particularly good investments and the industry is hard to truly understand.  Even when journalists approach hedge funds on a benign subject, that kind of story can still come with a dig. 
• I can’t blame good managers from being reticent.  It takes time to get stories and details precisely right, and most journalists are working under strict deadlines. One off-handed statement or poor reference in an article can prove very costly to a manager.  So why take the chance? It helps when an analyst or journalist understands this, because it’s expensive and hard to start a hedge fund and most press exposure is likely not worth the risk.
• That said, last year’s survey included six fund profiles, most of whom had never been interviewed before.  They ranged from a small US hedged equity shop, a merger arbitrage manager who was part of a multi-billion-dollar firm, to a Middle East/North African equity fund and a manager investing in frontier African sovereign debt. 
• Managers see that for two decades my goal has been to focus on the handful of shops that are actually delivering on the promise of independent asset management.  Since I’m interviewing managers who have a solid long-term track record, they know I’m looking to explain their success. 
• But at the same time, I make it clear that there’s also a lot to learn from missteps.  I want to write about when a manager stumbles.  They all do at one time or another.  There’s no embarrassment there.  Recovering from problems reveal character and commitment to their investors.  Moreover, there’s often a really good lesson in explaining why an ostensibly sound investment turns bad. 
• Sometimes it’s timing, sometimes it’s not having seen all the risks, sometimes, it can be triggered by an event that comes out of left field (US baseball parlance, i.e., coming out of nowhere).  To me, a manager that is candid in explaining failure is more likely to be a straight-forward type of person, and that quality, along with proven competence, is what allocators should be looking for.    

• I’m motivated to sustain this survey because none of the publications that used to support such efforts (which I managed) are producing this time-consuming research.  You’ll more readily find articles on the wealthiest funds and managers than any kind of in-depth look at performance. I like having cornered this small piece of the market. 
• Something quite different from any other survey I’ve seen or managed: I produce quarterly reports that track the subsequent performance of the Top 50 funds for the entire year following their selection. This review tests the merits of my survey.  Last year’s Top 50 funds, selected based on 5-year trailing returns through 2021, proceeded to outperform the S&P 500 by nearly 24 percentage points in 2022.
• I like seeing what each year brings, new allocators and managers that come my way. It’s a remarkable learning experience. And the survey is a compelling forum in which I can dive into contemporary issues and finance.  I’m always wondering around what theme I should build the survey. And my work always leads to new unexpected opportunities, like meeting up with the head of NilssonHedge. Who’d have thought?

More of Eric’s work can be found here The Global Investment Report.

We have collected returns for 85% of the funds that are expected to report for June 2023 and we are proud to present our “hit list”. We present the top five, but also the bottom five to balance the impression. Where there are gains, there are also losses.

To sign up, simply visit our website and provide us with your email address. We promise not to spam you or share your information with third parties, and you can unsubscribe at any time. Don’t miss out on this valuable opportunity to stay ahead of the curve in the ever-changing world of finance.

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided. 

Market Neutral

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here. 

Equity Long/Short

To explore our extensive Equity Long/Short-list, with dynamic rankings, please see Link

Event Driven

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

Summer is setting in across most markets and we see relatively small moves across our strategy indices. Most of them are showing positive numbers for the year, with the minor exception of Event Driven strategies that are struggling to deliver positive results. Volatility has been relatively low and perhaps a hindrance to the more dynamic strategies. Together with sector and style shifts in equity markets, the first half of the year was somewhat mediocre for the average Hedge Fund.

Risk Parity, which is nowadays a traditional asset allocation strategy, has enjoyed an upward drift in equity markets and less catastrophic bond performance. The volatility overhang from last year is still reducing position sizes for most risk-managed strategies.

Long/Short Equity has continued to benefit from the explicit (yes, not implicit) beta component but has, on average, struggled to deliver the expected 0.5 x Major Equity indices. With the US Equity Market up ~15%, seeing 3% for ELS is underwhelming. They may have partially preserved capital better last year, but the upcapture on a year-to-date basis has been on the low side.

In 2023, Technology stocks have been a tear. Here the performance of $ARKK with a performance of 44% YTD is a good illustration of the recovery. Like Crypto strategies, it has a large drawdown to recover from 2022. The rapid shifts in styles and sectors have not made it easy to be a long/short equity strategy.

Event Driven has failed to produce any spectacular performance as of late, as deal flows have been rather unremarkable, seeing a decline last year and a weak start to 2023.

Crypto strategies experienced some remarkable fireworks in January but have thereafter been a tad boring. We noted earlier that the dispersion of the managers is now at all-time lows.

And finally, what you have been waiting for, CTAs have done a remarkable job of recovering the March Fixed Income related drawdown. Our main CTA index is now back to positive (+0.7% for 2023). That does, however, hide a lot of dispersion between managers, but most styles have delivered about the same numbers. Momentum-based (aka Trend Followers) strategies are still down for the year whereas option strategies have done nicely for the year.

CTAs have done a number of position changes, but are still “short-ish” in Fixed Income despite the bear-market rally in March. Otherwise, we note a switch to long positions in Copper, Equities, and in the Euro, short in Crude Oil, and whipsaws in Gold.

With that, we hope that the second half of the year will present better trading opportunities.

A few days into July, we can present our first estimate of hedge fund performance for June 2023. June looks like a strong month for most strategies. The start of the summer offered glowing hot equity markets, interesting developments in Cryptos (ETFs galore), and a continued guessing game if the inflationary pressures are transitory for longer or not.

In June “risk-on” strategies did generally well, and based on a small sample of approximately 500 funds, we can see that Risk Premia, followed by Equity Long Short and Risk Parity funds are occupying the top three slots. Follow the links below to see how the indices have done year-to-date.

Risk Premia	4.3%
Equity LS	3.4%
Risk Parity	3.3%
Event Driven	1.4%
Market Neutral	1.0%
CTA	0.9%
Crypto	-1.0%
Fixed Income	-1.3%

June had strong returns for equities (Major US Indices ~+6.5%) as retail investors continued to shift assets into risk strategies. This was reflected in the strong performance of the Risk Parity and Equity Long/Short strategy. Crypto strategies, usually a beneficiary of strong equity markets, did not follow the market closely. Crypto managers are still outperforming on a year-to-date basis. For the more traditional indices, Risk Parity is making a strong comeback as betas are making a comeback.

CTAs had a small gain, driven by a long-ish exposure to equities, and short duration. Views that generally worked in June. Trend-based Commodity positions likely detracted. While our observations are based on daily indices, these may deviate from the complete monthly index.

Of note is that within the Equity Long/Short community, we see beta exposure to the equity markets. From the low reading a year ago, these values have now gradually increased towards the more steady-state value of about 0.5. This is an observation that we do not observe for Market Neutral or Event Driven strategies.

As usual, our databases are updated with the latest estimates. If you are a Canadian or US-based investor, looking for an intuitive portfolio management construction tool, we would like to highlight the launch of one of our data partners’ applications. SigmaSandbox is offering a 60-day free trial.

We also fixed a minor WordPress issue that occasionally gave the impression that this update was a paid update. Fixing Twitter is beyond our competence though.

We like Dispersion, it tells us if an environment is a suitable environment for the strategy, or if you need to be skilled to pick funds or allocate to specific systems and portfolio managers.

In the current environment we are seeing lower manager dispersion, and picking the right style is more important than selecting the best manager within a group. This can of course change rapidly, if positions and markets start to diverge.

There are a few interesting observations, which is largely reflective of the May-23 trading environment.

• Crypto Managers are trading within a tight range, one of the tightest dispersion on record. While this is generally the most volatile strategy class, we are two standard deviations below the mean, in terms of Dispersion. This is an environment where a variety of strategies largely behave the same.
• Crypto Manager dispersion is almost on par with traditional Liquid Alternatives. We have also observed lower and lower volatility across Crypto Strategies.
• Event Driven and Risk Premia, are two strategies that are exhibiting slightly elevated levels of Dispersion. These two strategies had negative results during May-23.
• CTAs are still slightly below average dispersion, but have recently started to build positions and we see dispersion increasing slightly.

CTAs are back to positive numbers, on average. But as usual, the average hides a lot of dispersion. Trend following is still negative, on average, and is the strategy group that has struggled to generate positive results year-to-date. Most other strategies are slightly positive for the year.

Looking on a year-to-date basis, you probably made money as a Hedge Fund allocator. Event Driven, is one of the few hedge fund strategies that are struggling.

You can follow continously updated Dispersion statistics here.

May 2023 was a month with weak beta returns, as global equities and bonds declined modestly. Central banks settled into the transitory for longer narrative and while the FED ultimately paused in June, other central banks kept pushing rates higher. Trend Followers continued to recover some of their losses, while Crypto and Risk Parity strategies ended up at the bottom.

As per our usual programming, we have collected slightly more than 80% of the managers that we expect to report for May (1811 strategies, of which 534 Commodity Trading Advisors). We can have reasonable assurance that we are giving a solid representation of the managers that had the best of times and the managers that had the worst of times. From a performance perspective. Odey’s funds did definitively not have the best of times, but that has yet to impact their performance.

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website at the Link provided. 

Market Neutral

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here. 

Equity Long/Short

To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

It is important to note that our rankings are not filtered for Asset Under Management, meaning that funds of any size can be included in our analysis. Our rankings are based solely on a simple return metric without adjusting for volatility, so some funds may have a higher risk profile than others.

To be included in our rankings, funds must have reported returns for the current reporting month. This means that we may not have data on all funds in a given category, and our rankings should be considered within the context of the funds that we do have information on.

Past performance is not indicative of future results.

Crypto Hedge funds had their day in the sun during the feverish Covid period in 2020 and 2021. The strong beta results generated a remarkable number of managers starting to market in 2021 and 2022. Our Crypto Index had two exceptional years in 20/21. Despite a rough recent period, we are continuing to see additional funds coming to the market.

In 2023, the index has bounced back, partly driven by a strong comeback for Tech. Lately, the indices have decoupled from the Nasdaq index, and May and June will likely have taken some oomph out of the results, on the back of increased regulatory scrutiny.

In hindsight, being directional throughout last year, was the wrong call for a market dominated by a significant drawdown. That said, even after exchange failures we continue to see many new strategies. This time around, we are seeing managers with more sophisticated approaches to markets, various arbitrage strategies, yield farming, and short-term trading.

Thus, Crypto Trading is not dead, but managers are much more sophisticated today than they used to be. Even the Long-Biased managers have, maybe by necessity, added hedging strategies to avoid rapid declines.

Crypto Traders – Numbers

Looking across the NilssonHedge Crypto Hedge Fund database, we are thirteen manager shy of tracking one thousand strategies. Currently, the number of managers tracked is 987 and most of the new managers are non-directional (although a majority of the existing strategies are still highly directional).

We believe that our database is one of the larger databases focused on Trading Strategies. We typically do not have a large amount of Venture Capitalist strategies in the database.

Pre-2022, most of the strategies that we tracked had a HODL approach, buy Bitcoin or any portfolio of cryptocurrencies and hold on for dear life. And a lot of them discontinued return reporting during 2022 as it is difficult to entice investors into strategies with significant drawdowns. Today, we are seeing managers deploying a range of market-neutral strategies, generally a more sophisticated approach.

New Index – Market-Neutral Crypto

To reflect this reality, we will launch a subset of our Crypto Index focused on more market-neutral strategies. We expect to have done the research and will launch the index at the end of the month. This will generally have much lower volatility and be significantly less correlated to Crypto Beta.

Market Neutral strategies will impose significant Due Diligence hurdles. Multiple exchanges and an additional set of instruments are two of the many hurdles that may make these strategies harder to allocate to. On top of that, the underlying strategy is now much more complex than simply holding tokens.

Clouds on the Horizon?

One of the indicators that we track is the number of Sophisticated “retail” strategies (some of them have 20+ in aum), and here we are yet to see an improvement in the sentiment. That probably means that the counterparty for any Crypto trader has switched from a sentiment-driven trader to a likely institutional, market-inefficiency trader.

Coinbase recently made a substantial report on how to think about Crypto (partly using our data to illustrate correlations). The report can be found here: https://www.coinbase.com/institutional/research-insights/research/market-intelligence/asset-allocators-guide-to-crypto-hedge-funds

Based on preliminary reporting by more than 1,300 hedge funds and liquid alternative strategies, May turned out to be a tricky month for many strategies. While we do not yet have the full picture of all strategies, we can infer a few conclusions regarding what worked and what did not work in May 2023. Despite flat to positive equity markets many strategies recorded losses.

On the positive side, CTAs seem to have done relatively well and have printed a modestly positive result of 0.5% taking the strategy back to flat returns, and recovering some parts of the March drawdown.

Index	May	April	YTD
Crypto	-6.2%	-0.7%	25%
CTA	0.5%	0.9%	0%
Equity LS	-0.9%	0.2%	1%
Event Driven	-1.9%	0.2%	-2%
Fixed Income	-0.3%	0.3%	1%
Market Neutral	-0.1%	0.1%	1%
Risk Parity	-1.0%	0.2%	4%
Risk Premia	-0.6%	1.0%	1%

We observe modest to negative returns from equity-dependent/adjacent strategies. Event-Driven and Risk Parity strategies suffered the most during a month that was characterized by a positive, but largely range-bound equity market and falling bond prices. [Directional] Crypto strategies had a negative month but are still the best-performing strategy on a year-to-date basis with a result of +25%.

Index	May	April	YTD
CTA Commodities	-0.4%	0.6%	1%
CTA Commodities Disc	-0.8%	0.3%	0%
CTA Disc Macro	0.3%	-0.3%	0%
CTA Discretionary	0.0%	0.2%	1%
CTA Fund of Funds	0.9%	2.1%	1%
CTA Quant	0.4%	0.3%	1%
CTA Short Term	0.8%	0.5%	1%
CTA Systematic	0.6%	1.1%	0%
CTA Systematic Momentum	1.2%	2.0%	-3%

Diving deeper into the CTA sub-sector, we note that Trend Following managers returned 1.2%, taking the YTD result to negative 3%. Commodity managers, where in particular discretionary managers faced difficult conditions, lost 80bp, and are flat for the year.

We would like to draw attention to the diversifying index, the NilssonHedge Quant CTA Index, an index consisting largely of non-trend following strategies. Consisting of more than 140 managers there is ample room to find more niche strategies. Not all of them are crowded nor are they expected to deliver strong performance. But, diversification within the group has created an index that has done well to their larger peers in 2023.

While the daily indices contain a fair amount of noise, we can highlight that CTAs have managed to recover some of the Fixed Income related drawdowns that took place in March. However, the strategy is behind most of the other Liquid Alternative strategies on a year-to-date basis.

To check out how individual strategies did, the NilssonReport offers some quick insights.

Thanks for your support.

Behind the scenes, we have been working hard to create a unified, standardized, and informative Factsheet. The Factsheet allows you to inspect strategies, and gauge the competitiveness of a particular manager, compared to peers and benchmarks. This report is available on a bespoke basis and is currently only available upon request.

The report comprises five pages, the first one shows the manager compared to the NilssonHedge indices, including a number of stylized statistics. We volatility adjust the indices to the manager’s volatility.

Here we note that some of the NH Indices have large volatility compression, as they are highly diversified. About 2/3rds of the individual manager’s volatility is diversified away (the median manager has approximately 10% annualized volatility and our index has a volatility of about 3.5-4.0%). Thus, the volatility-adjusted index is hard to beat. Pages three and four will alleviate some of the problems with risk-adjusted index returns.

The second page plots various risk statistics:

• The Drawdown chart, compared to the relevant benchmark. We highlight the deepest drawdown and also the longest recovery period.
• Annualized Risk (here we take a shortcut and use the standard deviation of returns). Here also compared to the main style index.
• The third chart shows a rolling 36-month correlation against a set of indices. We are currently experimenting with the number of benchmarks to include.

On pages three and four, we compare the manager to a broad peer group. Here we calculate every the VAMI of each and single competitor in their style group. At every point, we find the 25th and 75th percentile cutoff. This removes the volatility compression that can be found in indices and may thus be a better way to assess the quality of any single manager.

In addition to calculating the dispersion, we present the more traditional box plots. These are periodic returns and give any manager or allocator a quick way to understand the market environment a strategy performs strongly or poorly.

The fourth page contains volatility-rescaled data and may give different results for managers that are either more or less volatile than the median. This is a way to highlight the risk-adjusted returns. We also present the result of the highest correlated peers above a dynamic AUM threshold.

The sample factsheet can be downloaded below. Please note the disclaimer on the fifth page.

April was an interesting month, with some Trend Following CTA making strong returns. Some Crypto managers have staged a strong comeback in 2023, but the majority of them are still in a severe drawdown. We also note strong performance from equity beta-driven strategies, with some nice results for Equity Long/Short strategies.

Based on the most recent return data that we have available, we can provide a comprehensive overview of the top-performing and worst-performing strategies for each category, taking into account both monthly and yearly results. Our analysis is based on proprietary composite data streams that we have compiled, but we must note that there is always the possibility of errors or inaccuracies in our calculations.

CTA

To explore the full list of CTAs and their rankings, including dynamic updates as new data becomes available, we invite you to visit our website using this Link. Here, you will find a wealth of information on the performance of different CTAs across a range of markets and strategies, as well as insights and analysis from our team of experts in the field. 

Market Neutral

Market Neutral is a popular strategy among investors due to its low volatility and steady returns over time. Unlike other strategies that may produce large gains or losses in a short period, Market Neutral tends to accumulate returns gradually over time. This makes it an attractive option for those looking to achieve steady, long-term growth without taking on excessive risk.

To explore our extensive list of Market Neutral funds and their dynamic rankings, we invite you to visit our website at the link provided here. Here, you will find a wealth of information on the performance of different funds, as well as insights and analysis from our team of experts in the field. Whether you are a seasoned investor or just starting out, our Market Neutral rankings can provide valuable guidance and help you make more informed investment decisions.

Equity Long/Short

Equity Long/Short strategies are investment approaches that involve taking both long and short positions in equities in order to potentially profit from the performance of individual stocks or the broader equity markets. 

To explore our extensive Equity Long/Short list, with dynamic rankings, please see Link

Event Driven

Event-Driven managers are commonly exposed to various arbitrage/spread risks related to specialist situations securities. Managers with concentrated exposure tend to end up on this list and exploring the drivers of out or underperformance may yield insights.

To explore our extensive Event-Driven list, with dynamic rankings, please see Link

Fixed Income

Similar to Equity Long/Short managers, Fixed Income managers are typically influenced by the underlying market conditions. However, for this list, the focus is on managers who are sensitive to a specific subsector of the fixed-income market, particularly those engaged in the lowest part of the capital structure.

To explore our extensive Fixed Income list, with dynamic rankings, please see Link

Risk Premia

Risk Premia managers are commonly implemented well-explored and researched systematic strategies. These may be viewed as a general proxy for Hedge Fund exposure. Performance of specific factors may reveal differences and similarities to your own portfolio. To explore our extensive Risk Premia list, with dynamic rankings, please see Link

Crypto

As usual Crypto tends to have the most volatile numbers. Returns tend to be double-digit (or even triple-digit for the best funds and for obvious reasons rarely more than double digits for the worst ones), simply due to the volatility of the asset class. To explore our extensive Crypto Strategy list, with dynamic rankings, please see Link

Past performance is not indicative of future results.

It is important to note that our rankings are not filtered for Asset Under Management, meaning that funds of any size can be included in our analysis. Our rankings are based solely on a simple return metric without adjusting for volatility, so some funds may have a higher risk profile than others.

To be included in our rankings, funds must have reported returns for the current reporting month. This means that we may not have data on all funds in a given category, and our rankings should be considered within the context of the funds that we do have information on.

Overall, our analysis provides a useful starting point for investors who are looking to compare and evaluate different investment strategies. It is important to keep in mind that no single metric or ranking can capture all of the nuances and complexities of the investment landscape, and investors should conduct their due diligence and consult with financial professionals before making any investment decisions.