Quant funds that make money surfing the momentum of markets saw a promising year slip away in 2024 when big bouts of volatility lashed everything from Japanese stocks to cocoa futures and Treasuries.
After jumping out to the best start to a year since 2008 thanks to concerted rallies in equities and commodities, the trend-chasing cohort saw gains all but vanish as orderly markets turned turbulent. An index compiled by Societe Generale SA tracking the category finished with a 2% rise.
Trend-following funds come in all shapes and sizes with various allocation horizons, but the broader universe suffered losses or flat returns in the second half of the year amid reversals in European equities, energy and metals, as well as volatile bond markets. The $1.9 billion Virtus AlphaSimplex Managed Futures Strategy Fund was headed for a 12% advance in May but finished the year with a 3% loss. DUNN Capital Management LLC, whose flagship $800 million fund was headed for a 34% gain last year as of March but finished 2024 with a 7% gain, according to data by IASG.
Even the biggest winners of the first half have significantly trimmed gains. Mulvaney Capital Management Ltd., founded by a former Merrill Lynch options trader, had racked up a near 150% return as of May thanks to strong trends in agricultural commodities. But the 2024 increase was trimmed down to 83%.
“Trend following does the best when there are distinct and persistent trends in often one or more asset class,” said Kathryn Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group. Last year, “markets were very back and forth based on monetary policy response which finally came but never as fast or as strongly as the markets had anticipated.”
Programmatic and in many respects passive given their rules-based approach, the group — most of which occupies an institutional category known as commodity-trading advisers — is largely at the mercy of how price trends interact with their preset systems for ducking in and out of markets. Escalating geopolitical conflicts, uncertainty about the US presidential election, unpredictable central bank policy and transitions between economic regimes became a recipe for losses as the year played out.
Along with a reversal in key commodity trades, volatile fixed-income and currency markets created pressure in the second and third quarters. Trend following in fixed income suffered the biggest losses across asset classes, according to Societe Generale indexes. Additionally, short bets on currencies including the pound, Swiss franc and euro turned against them when a four-month rise in the Bloomberg dollar index was halted. Short-yen positions ran into trouble when the Japanese currency surged starting in July. One-way trends were harder to find with markets so focused on changing expectations for interest-rate cuts.
While a perhaps disappointment for individual purveyors, the year’s results can also be viewed in the context of the quant group’s role in providing portfolio diversification for institutional managers in search of returns uncorrelated to larger asset categories. That worked well in 2022 when CTAs posted one of their best years ever even as the S&P 500 dropped 19%. Now, after the stock benchmark jumped 23% in 2024, a regime change could set off another boon, according to James Dailey, chief executive officer of DUNN.
“CTAs, especially trend followers, have an established history of strong returns during equity crisis periods,” said Dailey. “In a potential reversal in equities, CTAs could definitely emerge as winners, especially if the drawdown in stocks is sustained over multiple months.”
While institutional assets in the category have held relatively steady over the past decade — $336 billion was overseen in managed futures at the end of the third quarter, compared with $334 billion in 2014 — efforts are afoot to bring the strategies to the masses, including via an exchange-traded fund application last year by BlackRock Inc. and the launch of the Virtus AlphaSimplex Managed Futures ETF. One of the most popular products — the $1.3 billion iM DBi Managed Futures Strategy ETF — saw a $600 million inflow last year despite a single-digit gain.
The Simplify Managed Futures Strategy ETF managed to triple its assets last year and scored a 24% gain, outperforming trend-following benchmarks by a large margin. To Paisley Nardini, asset allocation strategist at Simplify Asset Management, the key to their strong growth and performance was underweight duration positioning in the fourth quarter and earlier last year. Additionally, their ETF offers no equity exposure to reduce the correlation with stocks.
“2025 is looking to be a solid year for trend following and managed futures,” said Nardini, who sees a few catalysts for the cohort including, “full valuations in equities and continued volatility in bonds as markets digest inflation and monetary policy action.”
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