From crisis to trends

Trend-following opportunities in COVID-19 post-crisis inflationary markets

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The COVID-19 pandemic has upended nearly all aspects of life and is reshaping the world in every dimension. Actions by governments and central banks but also societal and behavioral changes in response to the pandemic had profound effects on equity, bond, commodity and currency markets. In this note, we observe that the COVID-19 crisis – like other major crises in the past – has given rise to plenty of opportunities for trend-followers, characterized by a breadth of powerful and concomitant market trends across all major asset classes. If trend opportunities since 2015 were largely in bond and equity markets, the last six months have seen the emergence and confirmation of powerful trends in multiple commodities and across major currency markets.

This attractive post-crisis market environment has had a substantial impact on the positioning of a typical CTA trend-following portfolio. We will show how risk exposures of such a portfolio have shifted throughout the initial months of the pandemic and later on as a consequence of the new post-crisis trend landscape. We highlight how, and how quickly, the adaptive nature of a CTA trend-following approach changed the risk factor profile of such portfolios, taking into account the dynamics of cross asset class correlations. We conclude that diversified trend-followers are well positioned to capture the upside of a potential continuation of a post-crisis inflationary market environment with increasing equity, energy and commodity prices, a further depreciation of the US Dollar and rising global yields.

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Quantica Capital
February 26, 2021