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What Crisis Alpha?

Trend Following strategies is often marketed as being able to provide Crisis Alpha, i.e. positive returns in negative equity markets. This is obviously more complicated than simply being short equity markets as most trend followers have diversified exposure which can create a rather different exposure than expected. That nuance is often lost in the marketing message.

So, in 2018 that showed both a bad equity market and generally poor Managed Futures returns, the strategy delivered preciously little crisis alpha. During 2018, there were four negative S&P 500 months, February, March, October, and December. From the database, we retrieve managers that are classified as trend followers and look at the average performance per manager. We find that the dispersion is large, but that the median manager delivered negative results in three out of four negative equity months.

We note that the odds of having a manager that provided offsetting returns in February, March and October was below 20% in any individual month. In December, the odds of having a manager that delivered positive returns was above 50%.

While not all of the managers have reported final numbers for 2018, it looks as if no manager were able to provide positive returns in all of the equity market down months. Delivering positive returns in three months resulted in a top ventile (20th) position while two months was enough to rank in the top decile for crisis alpha. More than half of the managers failed to deliver any positive returns in the negative equity months.

To analyze the data in more depth, please feel free to reach out for free access to the database.