Kettera Strategies' Heat Map for May 2021
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In a volatile market environment last May, discretionary macro programs proved to be the frontrunners, outperforming their model-driven counterparts across FX, commodities, and equities. The COVID-19 pandemic and related macro shocks led to high market volatility, dispersion, and policy-driven uncertainty, which discretionary managers navigated with agility.
Discretionary macro programs excelled in FX and commodities by exploiting policy uncertainty and supply/demand dynamics. For instance, energy commodities, such as crude oil, experienced a tricky month with prices falling mid-month then rallying strongly. Managers who were nimble enough to take profits on their longs, like those trading iron ore, were rewarded with a 25% rise in spot prices during the first half of May.
In contrast, equities trends favoured discretionary stock-pickers, who capitalised on sector rotations and idiosyncratic opportunities. The prevalent theme among systematic trend programs was that gains in FX and commodities outweighed setbacks in equities and fixed income. However, systematic/model-driven programs experienced more volatility in performance due to reliance on factor models and historical signal patterns, which were disrupted by the unprecedented market environment.
Equity Market Neutral indices, such as a blend of the BarclayHedge Equity Market Neutral Index and the Eurekahedge Equity Mkt Neutral Index, showed some resilience overall, but discretionary managers still outperformed in May 2020.
Multi-strategy hedge funds incorporating both discretionary and model components showed steadier returns, balancing directional bets with alternative strategies amid uncertain macro conditions. The Eurekahedge-Mizuho Multi-Strategy Index is an example of such a fund.
In commodity markets, discretionary approaches focusing on energy (gas, power) and green transition materials continued to find opportunities amid supply/demand imbalances through 2020 and beyond. Grain markets experienced volatility due to unexpected U.S. acreage and yield reports and contradictory demand rumors in May. Relative value traders using calendar spreads and inter-commodity ratio spreads generally performed better than outright directional strategies in these markets.
While direct May 2020 performance figures specifically isolating discretionary vs. model-driven strategies are scarce, the dominant theme across multiple sources is that discretionary managers had the edge in adapting to fast-moving macroeconomic trends impacting FX, commodities, and equities during that period. On the other hand, quant/model-driven programs faced headwinds but displayed potential for recovery post-volatility.
Common profitable themes in May for discretionary managers included long precious metals, long selected bond markets (including long US TIPS), short Bitcoin, and scaled back positions in commodities. The BarclayHedge Discretionary Traders Index, the BarclayCrypto Traders Index, the Barclay Ag Traders Index, and the BTOP FX Traders Index are some of the indices that track these strategies.
[1] [Source 1] [2] [Source 2] [3] [Source 3]
Discretionary managers successfully leveraged technology, such as advanced data analysis tools and market insights, to navigate the volatility in the finance sector, particularly in FX and commodities, during May 2020. On the other hand, investing in sports provided an interesting opportunity for some discretionary managers, as they observed a correlation between certain sports events and market trends, capitalizing on the dynamics to generate returns.
