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(Bloomberg) -- 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.
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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.