AQR Makes a Case for Trend Following as Inflation Fuels Comeback
(Bloomberg) -- AQR Capital Management is tapping into inflation fears on Wall Street to make its case for a decade-lagging quant strategy that fell flat in the pandemic volatility last year.
A new study from the quant firm argues that the trend-following investing style is among the few ways to eke out real returns consistently in the era of consumer-price growth.
AQR says that while bonds, stocks and even real estate tend to struggle, historically speaking, investors who surf the momentum of asset prices can net excess gains across inflation regimes -- including the current supply-driven breakout in prices.
“Environments of extreme inflation news and associated price reactions do not occur out of the blue,” a team led by AQR Principal Ashwin Thapar wrote. “They tend to be persistent enough that trend-following strategies can pick up on them at some point in the cycle and position accordingly.”
These are big claims from the Greenwich, Connecticut-based money manager, which invests in alternative strategies including systematic momentum. But returns so far in 2021 offer some evidence, even if they lag major stock gauges.
An index of Commodity Trading Advisors, a type of hedge fund that employs the strategy, just posted its best month in six. With a 9% gain, it’s on track for the strongest year in seven.
To many on Wall Street, a turnaround for trend-following is long overdue. By design, it is avowedly nimble -- taking advantage of a wide range of environments by buying assets that are going up and selling those that are going down.
But the low-volatility, low-inflation world of the past decade turned CTAs into underperformers versus a traditional portfolio of 60% invested in stocks and 40% in bonds.
Worse still, the strategy disappointed investors anew during the pandemic crash when it delivered little of its oft-touted “crisis alpha.” AQR’s own Managed Futures Fund has seen assets dwindle to $1.3 billion from a peak of $15 billion in 2016. The fund’s net asset value lost 21% over the period.
But earlier this year, CTAs notched one of their best months since 2000 amid the reflation trade, and they’re now making money again by riding the same wave via long bets on commodities and shorts against bonds. Man Group, the largest listed hedge fund that also offers trend funds, said in August the trend-following strategy “provides the most reliable protection during important inflation shocks.”
This flurry of research arrives amid growing investor anxiety over the toll inflation may take on traditional assets. With price pressures rising at a time when asset valuations are already elevated, a lost decade may be looming for 60/40 portfolios, Goldman Sachs Group Inc. strategists led by Christian Mueller-Glissmann wrote in a note Monday.
According to AQR, while well-known hedges like commodities and breakevens do gain with consumer prices, such allocations expose investors to the risk of an inflation reversal. And against the popular consensus, real estate tends to fall in inflationary times. By contrast, trend following is flexible enough to adapt.
The study also touts macro momentum, a strategy similar to trend following that rides a slew of economic regimes.
“Allocations to a diversified combination of commodities, inflation breakevens, global macro, and trend following can thus help meaningfully to offset a traditional portfolio’s concentrated exposure to inflation,” the AQR team wrote.
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