They essentially take advantage of pricing trends by buying what is going up, and selling what is going down.
This year, buying energy contracts and selling bonds has succeeded. Aspect returned over 8 per cent in April, and is up almost 30 per cent so far, year-to-date.
April was the worst month in three decades for fixed income investors who are nursing double-digit losses in 2022. Global equities too have taken a battering, as the MSCI World Index has shed more than 17 per cent in US dollar terms.
That has put pressure on the 60:40 portfolio that invests on the assumption that bonds will gain in value in times of turmoil to offset falls in equities.
“All you’ve needed to do is hold on to stocks and bonds and buy the dips, as you know you’ve got the Fed put,” Mr Todd said. “But it’s all changed. We’re going through a significant transition in the markets now.”
Many tailwinds that supported stocks and bonds over the last four decades are reversing, he added.
The globalisation trend has been replaced by isolationism, quantitative easing is shifting toward tightening, while deflation is being replaced by inflation.
“It’s not a blip, it’s an inflection point in how we’re going to see markets perform. The strategies that worked over the last 40 years will not be fit for purpose.”
And in the context of the last 100 years, the last 40 characterised by falling interest rates and rising sharemarkets are the exception. Returns from stocks and bonds “have been way in excess of what you would expect in the long term”, Mr Todd said.
He detected a growing concern among institutions that they currently have nowhere to hide, and which recognise that there is a risk that the pain of 2022 may persist.
“In talking to our investors, that’s the big fear: if we move into a stagflationary environment,” he said.
The current period, he said, is most analogous to the 1970s as inflation, rising energy prices and an aggressive central bank combine to create a tough economic and investing environment.
“We saw a pickup in inflation in 1990. We saw the Fed get behind the curve in terms of raising rates in 1995 and suddenly having to raise rates aggressively, and we saw a sharp pickup in commodity inflation in 2007.
“But you really have to go back to the 1970s to see all those forces come into play at the same time. That was the last time there was stagflation – a period of rising inflation and slowing economic growth.”
Trend following trinity
While there are signs that markets are in for a tough year, if not decade, trend-following strategies appear to be regaining their swagger.
Along with Winton and quantitative hedge fund pioneer AHL, which is now owned by the Man Group, Aspect is one of the three largest and best known trend following hedge funds.
Mr Todd’s partner Martin Lueck is the ‘L’ in AHL, while David Harding, the founder of CTA giant Winton, is the ‘H‘.
The collective growth of these funds and a decade of lacklustre returns led to suggestions that too much capital had crowded profits, to the point where they no longer worked.
But the evidence is they are working just fine now.
“It was just not a favourable market environment,” said Mr Todd.
He said Aspect’s 2022 numbers have been driven by trends mainly in energy, where prices have surged higher, and bonds, where rising yields have pushed down prices.
That has validated a view among some institutional investors, such as the Future Fund that momentum trading strategies are a solid diversifier in periods of higher inflation.
“In an inflationary environment, that can absolutely can drive some very strong trends in markets,” Mr Todd said.
