Model Hedge Funds Crushed (again)

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The below chart is nothing new to our readers. It shows the SPX (orange) and the CTA index (white). The CTA index represents the biggest global hedge funds that trade according to models. The index is updated with a slight lag.

As we have been pointing out for a few weeks, the model funds used to follow the SPX, both on the way up, early in 2018, as well as the initial fall in October. Since December, the model hedge funds space started accumulating net shorts, leading to nice gains for the aggregate CTA index as the SPX fell hard in December.

Many of the strategies these funds run are based on trend following. It takes time before the model’s “flip” from one trend “they observe” to a new trend. The chart below shows clearly, just as we warned about, that the current bounce has been extremely painful for the CTA based hedge funds. The pain trade for the CTA funds has so far been equities going higher.

Let´s see if the current 12% bounce in SPX from recent lows has managed the CTA crowd “flip” to longs again, just in time when the bounce starts to fade over past 24 hours.

Despite lacklustre performance, the CTA index space has great importance to how assets are moving as people have continued pouring in money to these funds and they manage some 360 billon USD.

Below chart shows the SPX (orange) versus the CTA index (white). It is interesting investors still continue pouring in money into these funds given the poor aggregate performance. The biggest irony would be to see people having invested more as the CTA index gained in December, when pretty much everyone else lost, only to see the CTA space turn lower again.

Source; charts by Bloomberg