At the end of last month’s piece we concluded with some gnomic optimism about hedge funds’ alpha this year, and as this may have come as a surprise, we thought to pick up where we left off.
In recent years, Central Bank policies have dominated the developed markets. Since the European Central Bank (ECB)’s decision to expand their asset purchase programme two years ago, these policies have been aligned to the point that asset class correlations moved up to levels last seen in the aftermath of the Global Financial Crisis, significantly above the levels that prevailed almost without interruption between 1991 and 2007. As a business, Man cares about CTA performance, and consequently keeps a sharp eye on this correlation, because when it is low, CTAs have historically done better, and some of their worst years coincide with the higher levels. It isn’t hard to see why this relationship persists: low correlation means that volatility-scaled portfolios can run with more exposure because diversification is higher. Well, with synchronised central banks the markets were monothematic, macro opportunity was thin and CTAs did poorly.