Think About It

The public is flocking into short option and high frequency programs at current–many of which are held out as managed futures investments. With a current low VIX both of these programs perform nicely. As a result money flows out of trend following or doesn’t flow there at all. When the market invariably melts the VIX will explode. High frequency and short option jockeys (i.e. LTCM) will lose dramatically while trend followers will do very well.

However, when this happens investors will sour on the managed futures asset class. Why? Because the public is putting money into programs that will lose in the face of disaster. This is a major conundrum with the phrase managed futures–it’s an umbrella term that groups polar opposite investing strategies. Short option programs are highly correlated with an advancing market and when equity markets fail–so will they. Trend followers are loosely correlated with equity markets and when equities decline they will typically make the big money.

End result? The general public is doomed to failure as they chance their returns. They have a tendency to put money into programs at the wrong time. Allocate to trend followers when the VIX is low. Buy trend followers on drawdowns and don’t chase returns—that makes much more sense.

Think about it.

Note: Trend following is the primary strategy under the managed futures headline.

You might like my 2017 epic release: Trend Following: How to Make a Fortune in Bull, Bear and Black Swan Markets (Fifth Edition). Revised and extended with twice as much content.

2 thoughts on “Think About It

  1. Great post. If you look at the hedge funds who have long track records like Soros, Tudor, Moore, Caxton, and the CTA/systematic types like Winton, Chesapeake, and so forth, most of them are having some of their worst years. A bunch of these are down anywhere from 0.5 to 15% because vol is low, macro stories get crushed by central banks, and ZIRP prevents traders from collecting carry in any decent clip. HOWEVER, when all these option selling, vol arb, “range playing” models have their worst years, you can’t do research on them BECAUSE THEY CEASE TO EXIST. The difference here is huge and not even having caps lock on can express it. When this corrects we will be able to divide investors into two groups, one that still has their principal and the other who is in a class action lawsuit because the founders of the fund never pulled the cord on a strategy with a long run negative expected value.

  2. Every couple of years (once a decade?) trend following has to do poorly simply to make sure enough money flows out of it, so trend followers can start making money again. It is a zero sum game after all.

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