System traders, how good do you think you are?

[InsvestoBoy]

What kind of long term expectations do you have for your money if you trade using a system like long term trend following?

Do you think over the long term, let's say next 10 years, you will return 5% annually, 10% annually? 20% annually?

I thought it would be an interesting question to ask, as I am currently looking at the prospectus for a couple of investment products and found their annualised return over the last 10 years to be quite interesting.

For example, here is the (net of all costs/fees) performance of the "Man AHL Alpha (AUD)" fund, which is both long and short across all asset classes represented in futs markets as well as equity sectors.



(from their latest monthly report https://www.gsfm.com.au/cms/wp-cont...port_-_Retail_Audience_English_30-07-2019.pdf)

Now this is a fund that advertises itself as:

FUND OVERVIEW
The Fund provides investors with access to one of the world’s longest running managed futures programs, which has historically experienced a low correlation with the performance of traditional asset classes such as equities, property and bonds1.

The investment approach is a fully systematic, research driven, quantitative process that exploits technical or price driven signals through investment in a broad range of futures and forward markets, as well as highly liquid OTC markets. It is underpinned by the AHL Alpha Program, a sophisticated computerised managed futures program designed to identify and capture trends across a range of sectors including stocks, bonds, currencies, agriculturals, metals, interest rates, energies and credit.

The AHL Alpha Program primarily adopts a ‘trend following’ investment approach, meaning that it seeks to generate returns from sustained price movements (price trends or other repeatable patterns) in the markets it accesses; these can be either upward or downward price movements.

THE FUND AT A GLANCE

• A quantitatively driven managed futures product
• Managed futures are generally uncorrelated with traditional asset classes
• An allocation to managed futures within a diversified portfolio has the potential to reduce risk and enhance returns
• Risk management is an essential component of the investment process
• Large investment team (140+) with strong academic qualifications

So if you think you can achieve 10%, 20%, or more p.a. over the long term, while a team of 140+ highly qualified individuals with no constraints on capital or strategy implementation can achieve only 5% p.a. over the long term with a Sharpe ratio of 0.24 ...what is your reasoning for why you think you can do better?

For example, one reason I might find valid is if you say "I trade my system in much more volatile parts of the markets so I expect my returns to be higher even though my Sharpe ratio would be about the same".

I don't want to sound like I am negative about trend following systems, in fact I implement a couple myself for governing certain exposure within broad asset class envelopes. But I am curious to see how peoples perceptions about their own futures performance match up against the performance of best in breed systematic traders and why they think that.

 

[Wyatt]

Well 1st obvious point to be made is they need to pay the 140+ highly qualified individuals and no doubt, highly. Bet their personal money is in something better, like an index fund!

Performance of this fund is probably typical of their type and well, disappointing for the punters who entrusted them with their money and not representative of the phrase "you get what you pay for"

It may do well when stocks crash again as it supposedly has low correlation to other stuff, but apart from that great run between 13 and 15, this is a dud for investors.

So what can proactive trend followers expect to make? Above index fund returns would be appropriate or the exercise while illuminating, would be a bit of a waste of time.

While the backtest (same time period) is not the future and as I have an inability to fully follow my system it seems, somewhere around 15% pa is great number for myself with hopefully lower volatility than the above. Sharpe ratio is similar, fund must put a lot in cash/fixed interest.

There is so much amazing info on this site to be utilised, kindly provided by some genuinely successful investors, readers have so much to assist them to do their own thing.

 

[InsvestoBoy]

While the backtest (same time period) is not the future and as I have an inability to fully follow my system it seems, somewhere around 15% pa is great number for myself with hopefully lower volatility than the above. Sharpe ratio is similar, fund must put a lot in cash/fixed interest.

Thanks for your reply, curious to hear why you think you can achieve 15% p.a. if professional trend followers can't? Is it just about concentrating all your bets into equities?

This isn't a dig, I'm only curious about your reasoning.

Well 1st obvious point to be made is they need to pay the 140+ highly qualified individuals and no doubt, highly.

The total fees for this particular product are 1.86%. So even if they didn't have any costs at al and we add the fees back to the return it would still be <10% CAGR.

It may do well when stocks crash again as it supposedly has low correlation to other stuff, but apart from that great run between 13 and 15, this is a dud for investors.

Based on my knowledge of many trading models, I think this is actually a pretty standard looking return curve for futures trend following models over the last decade.

Obviously if you had concentrated your bets into particular asset classes like equities the returns would be better but the whole point of futures trend following strategies is to be diversified across all asset classes and currencies.

So what can proactive trend followers expect to make? Above index fund returns would be appropriate or the exercise while illuminating, would be a bit of a waste of time.

Just curious to hear if you think there will ever be a 10 year period where equity trend following models would underperform the index?

 

[Wyatt]

Thanks for your reply, curious to hear why you think you can achieve 15% p.a. if professional trend followers can't? Is it just about concentrating all your bets into equities?

I guess the biggest difference is account size, these funds need to venture into the more liquid instruments, that the little guy can avoid, to some degree. @Skate and @captain black have posted some good info on this subject.

The total fees for this particular product are 1.86%. So even if they didn't have any costs at al and we add the fees back to the return it would still be <10% CAGR.

Yeah it is below par result, doesn't look much better with lipstick. Hasn't there been some research to suggest following funds with recent outperformance leads to lower returns, maybe these guys are due to hit their straps soon and make their longer term numbers look better. Recent good/bad times can make a big difference to perceived results, but are only natural market gyrations.

Based on my knowledge of many trading models, I think this is actually a pretty standard looking return curve for futures trend following models over the last decade.

Maybe you are correct. Maybe that is what is on offer. Not sure why you would put your funds out there apart from diworsification.

http://www.automated-trading-system.com/trend-following-wizards-june-2019/

Just curious to hear if you think there will ever be a 10 year period where equity trend following models would underperform the index?

I don't think so, not over 10 years. 1-2 years for sure as all systems get out of sync. I think we have seen in other threads, demonstrated here on ASF, that trend following (or momentum investing) where buying stocks that have gone up considerably over a wide range of time frames can outperform the broader indices. Some have breakout factors, some don't. Some use pattern recognition or volume signatures, others don't. Some use stops, others don't.
After all, you only need a handful of stocks going up against a broader market decline, to do well. There are not many long periods where all stocks fail to trend. Sure choppy markets are not going to work well with this style of investing, so some form of trend analysis is important. IE @peter2 's DUWU overview. Japan is often used as an example of stagnation that you are alluding to, but did that think blow off or what, prior.

2015 was a great example of this. Stocks such as BAL & BKL and gold stocks did very well in tough times.
The other significant area of potential outperformance is during sustained market dives. They are not all that common, but having a plan for that provides another opportunity to stay ahead of your benchmark index, whatever that may be.
I guess if you outgrow your given universe and need to look further afield, then why wouldn't you try and systemise that as well.

 

[BoNeZ]

A quick check of the Man AHL Alpha (AUD) website says they are "trading in futures, options, forward contracts, swaps and other derivatives" across "a range of sectors including stocks, bonds, currencies, agriculturals, metals, interest rates, energies and credit".

If you think shares are going to crash and other assets boom this might be the fund for you. Investing in a market ETF will probably do better if shares don't crash.

I'm using a trend based system to trade shares long only so I'm not sure the two compare. I don't know if I'm better than the 140+ team "with strong academic qualifications" but I'm achieving better returns focusing on what I'm doing.

 

[investtrader]

Futures,currencies etc are traded by thousands (probably) of hedge funds. These are funds that can have multi billions trading maybe 10 or 20 instruments. They are fee collectors mostly. Stocks trend way further than futures, which tend to trade in wide ranges due to the very nature of the underlying. The more 'sohisticated' the market, the more difficult to make money. There is a great little video of warren Buffet posted in another thread speaking about small cap stocks where he confirms what stock TF traders know.