Pure countertrend algorithms based on behavioral heuristics
Proof of concept / Pedigree:
31 year CTA history:
Discretionary Countertrend: Royston Investments 1987-2009
Systematic Countertrend: AHL 2009-10, Tudor 2011-16, 3SD 2017
Unique alpha evidenced by high negative correlations:
CTA Index -0.5 S&P -0.2 SG CTA Trend -0.6
Biases of human nature are inherent and 3SD’s system evolved empirically from divergent trading hypothesis of crowd behaviors
“We will have more crises and none of them will look like this because no two crises have anything in common, except human nature.” Alan Greenspan, Sep 2009
HFMWeek / CTA Intelligence
the power of negative
correlation in a crowded space
Peter Moon, CIO, 3SD Capital
“The industry has gotten crowded with too many managers following similar strategies.” Steve Cohen, May 2016
The market inefficiencies (‘edge’) they originally exploited are being competed away.
Managers with zero to negative benchmark correlation have the edge.
Maintaining an edge
One of the key selling points for CTAs has always been zero correlation to equities. But as the CTA sector itself has become over-correlated the resulting loss of alpha is weakening that argument and portfolios with CTA exposure must now look for CTAs that are not benchmark correlated.
Momentum remains a good strategy but if you can blend that with CTAs who have negative correlation, all portfolio metrics improve. The following example could apply to just the CTA component of your portfolio:
Table: If you have CTA in your portfolio, putting half with a negatively correlated CTA (with same annual return) could increase your portfolio’s CTA sector return by over 100%
|Negative correlation boost, without risk increase|
|Portfolio’s average annual return||11.8%|
|2 prospective managers, same return||11.8%|
|Correlations of new managers to Portfolio||-0.5||0.6|
|Portfolio’s new return with 50% blend of new manager, run at target volatility:||23.9%||13.3%|
|Portfolio returns increase by:||103%||13%|
The profit potential from negative correlation CTAs has been underpriced by the industry, due to its rarity
“The true idea of alpha is returns that no one else can produce, that are unique to you. If you are doing something that is more known – arbitrage strategies, trend following strategies, carry strategies – that’s worth something, those are good strategies. But they are not the same as alpha that nobody else can produce.” Cliff Asness, AQR, May 2016
3SD Capital’s Countertrend system is available to qualified investors via segregated managed accounts, minimum $5m investment. Top-tier service providers, daily liquidity, average margin 3%.
3SD Capital LLC
Mt Kisco, New York
Pursuant to 4.7 exemption limiting participants to Qualified Eligible Participants (QEPs) as defined by the Commodity Futures Trading Commission, this document may not be construed as an offer to sell or purchase any security or futures product, nor as a solicitation for participation in any investment product managed by 3SD Capital. Such an offer may only be made to qualified investors via the appropriate Disclosure and Advisory Agreements.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS AND RISK OF LOSS CAN BE SUBSTANTIAL. THE RISK OF LOSS IN TRADING COMMODITY INTERESTS CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.