Tuesday, July 5, 2016

Longer-term CTA's outperformed short-term traders during the June dislocations

The power of divergent trading is evident when there are large market dislocations. Under market stress or crisis, longer-term trend-followers will outperform short-term traders. This was the case in June. Both CTA's, which mainly consist of trend-followers, and short-term traders made money during the turbulent month of June, yet the extended trends especially in fixed income allowed the longer-term traders to generate higher returns. This was also evident in January when there was the significant equity sell-off. During the middle period, March through May, short-term trader were able to still make money in a more trundles environment. 

It is hard to predict when trend will appear so active switching between longer-term and shorter-term trying is difficult, but a mixed strategy of holding both will provide significant diversification benefit.

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