Trend-Following CTAs vs Alternative Risk-Premia

Crisis beta vs risk-premia alpha

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The turbulence of 2018 made it a difficult year for most systematic investment products. To the surprise of several investors, many of these quant products had been sold as market neutral. In particular, the new breed of alternative risk-premia (ARP) products – that had flooded the market a few years prior to 2018 – performed exceptionally badly. For example, the composite HFR Bank Systematic Risk-premia Multi-Asset Index lost -18%, in comparison with a loss of -4% on the S&P 500 total return index. However, traditional alternative asset classes also underperformed, with the flagship HFRX Global Hedge Fund Index losing -7% and the SG Trend Index losing -8%.

In the face of such losses, both investors and managers are asking how and why so many quant strategies underperformed? Still more importantly, what are the implications for the diversification of traditional equity-bond portfolios and alternative investments? In particular, since trend-following CTAs belong to a handful of tried-and-tested diversifiers, why did trend-followers not diversify in 2018?

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Quantica Capital
January 1, 2019