Exploring the Trend in Trend Following: Q Group Presentation
Exploring the Trend in Trend Following: Q Group Presentation
David M. Modest, Ph. D. October 19, 2020
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Disclaimer
This presentation is for the Q Group Fall 2020 October 19, 2020 and is for information purposes only. The information in this presentation is believed to be accurate as of the date set forth on the cover. Osprey Bay Capital is under no obligation to update this information. This presentation does not confer any rights on the recipients or impose any obligations on Osprey Bay Capital. This presentation is provided for discussion purposes only, is only a summary of certain information, is not complete, does not contain certain material information and is subject to change without notice. No assurances can be given that investment objectives will be achieved, and investment results may vary substantially on a quarterly or annual basis. As with any hedge, private equity, or venture fund, past performance cannot assure any level of future results. Actual returns for each investor may be different due to timing of investments. This presentation is neither an offer nor a solicitation to buy an interest in any fund managed by Osprey Bay Capital, which can only be made pursuant to a confidential private placement memorandum and only in a jurisdiction where permitted. The information contained herein is confidential and is intended solely for conference participants. Delivery of this presentation to anyone other than the recipient or his designated representative is unauthorized, and any other use, reproduction, distribution or copying of this document or the information contained herein, in whole or in part, without the prior written consent of Osprey Bay Capital is strictly prohibited.
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PAGE 2
Background
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Research Motivation
Bertrand Russell: ``When you are studying any matter or considering any philosophy ask yourself only what are the facts and what is the truth that the facts bear out. Never let yourself be diverted either by what you wish to believe or by what you think would have beneficent social effects if it were
believed, but look only and surely at what are the facts.''
? Research grew out of twenty months as Chief Investment Officer of AlphaSimplex Group (ASG) LLC from December 2016 to August 2018
? ASG (a Natixis subsidiary) focuses on liquid alternative strategies (i.e. strategies with daily liquidity). The two primary strategies are: - Managed Futures: multi-model, multi-horizon pure trend following strategy implemented using futures and forward contracts - Global Alternatives: seeks to replicate the exposures of hedge funds to a diverse set of risk premia
? Currently working on four papers that grew out of my experience there
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PAGE 4
Diminishing Returns for the Managed Futures Industry
Average returns have decreased as assets-under-management (AUM) in Managed Futures strategies have risen from roughly $300MM in 1980 to ~$300BB today.
Start Date 1980s 1990s 2000s 2010s
SG Trend Jan 2000
8.6% 2.0%
Average Returns BTOP 50 Jan 1987 22.2% 9.3% 6.6% 1.0%
Risk-Free
6.5% 4.8% 2.7% 0.5%
Direction of performance and fund flows consistent with Berk and Green (JPE 2004) .... although adjustment period appears lengthy
Note: Average annual returns on the SG Trend and BTop50 indices computed from return data on BarclaysHedge website. The risk-free rate data is taken from Ken French's website.
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PAGE 5
Difficult Investing Experience for Retail Investors
Experience for investors has been worse than the time-weighted average returns
Inception Date Est $ Profit Est $ Mgmt Fees Est $ Total Fees
CUMULATIVE PROFITS AND FEES SINCE INCEPTION
AlphaSimplex
AQR
Managed Futures
July 2010
Managed Futures
(MF)
Feb 2010
MF High Volatility
August 2013
AQR Total
-$158.8
-$1,050.2
-$166.1
-$1,216.3
$220.4
$673.9
$43.9
$717.8
$270.4
$830.9
$50.4
$881.3
Note: Cumulative profits from inception through June 2020.
Since the beginning of 2016, AQR's retail investors have lost ~$2.4BB in their Managed Futures products (regular and high-volatility) .... and ASG's retail investors have lost ~$300MM in their retail products
Note: Estimated profits are derived from return and AUM data provided in the CRSP mutual fund database. Estimated fees are derived from CRSP AUM data and fee disclosures reported on the SEC Edgar database. Profits and fees are cumulative estimates since inception based on end-of-month values through June 2020.
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PAGE 6
Back to Basics
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Back to Basics I
What do we truly know and what are we assuming?
Explicit Assumptions
Implicit Assumptions (examples)
? Buy what has gone up and
? Expected utility is maximized by
sell/short what has gone done
following a momentum strategy
? Even if you think there is a 95%
chance that an asset which has
gone down will rebound, you still
want to be short
? Trend follower preferred an Italian
10-year bond trading at 80 basis
points in Sept 2019 to the same
bond trading at 183 basis points in
August 2019
? Use multiple lookback windows to assess trend direction
? Optimal weighting of the windows is relatively unchanged over time ? Barbell approach with most of the weight 8 months
? Capital decisions are based on ? Benefits of increased diversification
risk rather than notional
outweigh leverage risks associated
allocations
with leveraged bond and other
leveraged positions
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