Kettera Strategies' Monthly Analysis - May 2022
Headline: Long-term Trend Following Strategies Suffer in May 2021 Due to Global Economic Fluctuations and Market Volatility
In May 2021, long-term trend following strategies experienced a decline, particularly in the energy sector and commodity-linked currencies. This downturn can be attributed to several factors, including global economic conditions, cryptocurrency market volatility, energy sector fluctuations, monetary policy changes, risk aversion, and market sentiment.
The global economy was experiencing fluctuations due to the ongoing recovery from the COVID-19 pandemic, leading to increased market volatility. This volatility negatively impacted trend-following strategies that rely on stable trends. Around the same time, the cryptocurrency market, particularly Bitcoin, experienced a sharp decline, disrupting strategies that rely on consistent trends in commodities and currencies linked to them.
The energy sector is heavily influenced by geopolitical events, changes in demand, and supply chain disruptions. Any instability in these areas can lead to price volatility, making it challenging for trend-following strategies to maintain profitability. Changes in monetary policy and interest rates can also affect commodity prices and currencies, as they influence the cost of borrowing and the attractiveness of investments.
During periods of economic uncertainty, investors often become risk-averse, leading to a shift away from commodities and toward safer assets. This change in market sentiment can undermine trend-following strategies that rely on sustained market trends.
Despite the challenges faced by long-term trend following strategies, some sectors fared better. For instance, those macro programs that also trade commodities performed well, particularly in the energy markets. Long positions in crude oil, petroleum products, natural gas, European power, and commodity-linked currencies against the USD were winning trades. Commodity currencies, including Mexico, Brazil, South Africa, Australia, and Canada, also performed well against the USD.
However, currency programs were generally down in May due to the USD's weakening against G10 currencies. The EUR/USD was one of the most notable reversals, with macro headwinds, including growing recession fears in the US and US interest rates falling, contributing to the USD's weakening.
Other sectors were choppy and lacked direction, resulting in negative overall performance. Industrial commodities (metals and energy markets) programs were down in May, but pure energy traders fared better. Base and precious metals strategies suffered due to multiple macro headwinds, including a strong USD, strict COVID-19 lockdowns in China, and slower global growth and recession fears.
Trading in equities indices was difficult for longer-term models. Ag and livestock trading in May was mixed, characterized by choppy/sideways markets.
Despite the challenges in May, it's important to note that trend-following strategies have historically shown resilience and the ability to recover from such downturns. As the global economy continues to evolve, these strategies may find opportunities to regain their footing and deliver positive returns.
The Barclay Hedge Crypto Traders Index, Eurekahedge Event-Driven Hedge Fund Index, The Barclay Currency Traders Index, A blend of the Barclay Discretionary Traders Index and Bridge Alternatives Commodity Hedge Fund Index, The Barclay Fixed Income Arbitrage Index, The Societe Generale Trend Index, The Societe Generale Short-term Traders Index, The Eurekahedge Relative Value Volatility Hedge Fund Index, Eurekahedge Long Volatility Index, The Eurekahedge AI Hedge Fund Index, The Barclay Agricultural Traders Index, and A blend of the Eurekahedge Asset Weighted Multi Strategy Asset Weighted Index and Barclay Hedge Fund Multi Strategy Index are all financial benchmarks.
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