Evening Brief – 11.15.23

Hedge Funds are Short Equities, Long Oil

Following disappointing October results, CTAs and trend-following hedge funds are increasing bets against global equities while maintaining long positions in oil amid ongoing Middle East geopolitical anxieties.

Societe Generale’s main SocGen CTA Index, a key industry benchmark, lost 1.20% last month.

Since the beginning of the year, the index, which follows the daily returns of 20 of the largest managed futures hedge funds, including Man AHL, AQR, Winton Capital Management, Millburn Ridgefield, and Aspect Capital, has gained only 0.57%.

It means trend-following hedge funds have had little to brag about in 2023. It reflects a significant turnaround from last year, when CTAs achieved their best performance on record, with yearly gains of more than 20% on average, helping to protect investors’ portfolios from losses in equities and fixed income.

The SG Trend Index, which tracks the daily returns of the 10 top trend-following hedge funds, including Aspect Capital, Graham Capital Management and Winton, lost 0.09% in October and is up only 0.86% year to date.

Managed futures strategies, which trade a variety of equities, bonds, currencies, and commodities futures using quant models, have found it difficult to capture significant momentum signals.

CTAs are now adjusting for higher-for-longer rates and the potential broader ramifications of the continuing Israel-Hamas conflict, with models claiming to have “markedly increased” their negative wagers in equities recently, according to Barclays research.

“We estimate CTAs to have built sizeable shorts in global equities, with room to add further, and have even flattened their exposure to the much-loved U.S. tech,” Barclays analysts said in a note.

“Rising geopolitical tensions have led to oil being the only meaningful long for CTAs, and the shorts in EU equities to be most pronounced. Additionally, short positioning in bonds and global currencies also remains quite elevated.”

Short-term trend-following strategies fared marginally better in October, albeit they have incurred greater losses year to date.

The SocGen Short-Term Traders Index, which measures the performance of CTAs and global macro managers with 10-day trading windows, increased by 0.47% in October. Managers, on the other hand, have lost 1.35% since the start of the year.

Despite earning more than 5% between March and June, CTAs and managed futures have been slammed by this year’s volatility in stocks and fixed income amid higher interest rates.