Over the past few years we have seen futures trend-following being used as a tool for institutional investors looking for “crisis alpha” — a term first used by Kathryn M. Kaminski and defined as profits gained by exploiting persistent trends occurring across markets during times of crisis. For investors, this means a strategy that has the potential to deliver outperformance during (typically equity) market stress periods.
Indeed, with prices of many traditional asset classes at or near all-time highs, we could see this search continue. Futures trend-following has historically shown potential to provide crisis alpha; in the 2007-'09 financial crisis, the MSCI World index lost 49.3% while the Barclay BTOP50 index, which is an index of the largest managed futures funds, gained 16.3%. Similarly, when the Internet bubble burst at the turn of the century, the MSCI index lost 45.7% and the Barclay BTOP50 gained 36.8%. Both of these instances are clearly visible in Figure 1. What this chart also shows is a near straight-up performance for bonds since 1985. Unsurprisingly then, trend-following strategies might have benefited from the nearly consistent upward trend by holding a (predominantly) long bond position over the past 30 years.