Industry insiders say that computer-driven trend-following hedge funds have profited this year from sharp volatility across a range of markets, including the September bond selloff and the surge in oil prices before the outbreak of the Iran war.

The diversification benefit that the classic 60/40 portfolio was supposed to provide has stopped working, while these funds can short bonds and interest rate instruments, allowing them to deliver standout returns.

Hedge fund strategies built on complex algorithms and machine learning techniques have outperformed the broad stock market this year. Trend-following hedge funds, also known as commodity trading advisors (CTAs) or managed futures strategies, are computer-based and use quantitative programs, statistical models, and price signals to process massive amounts of data and invest across a wide range of futures markets.

Their goal is to capture large, persistent upward and downward trends in stocks, bonds, commodities, and foreign exchange markets, trading along the trend and earning returns from sustained market momentum. The Societe Generale SG CTA Index is a major performance benchmark for the industry, tracking the daily net returns of leading strategies including Man Group, PIMCO, AQR, and Winton Capital. In the nine months through the end of the third quarter, the index returned 15.7%. By comparison, the S&P 500 gained 11.7% over the same period.

Early Anticipation, Contrarian Positioning, and Accurate Judgments

Industry insiders say that CTA funds accurately anticipated the sudden September bond selloff by shorting U.S. Treasuries. In addition, the funds captured early gains through long dollar positions and bets on rising oil prices before the outbreak of the Iran war.

Andrew Beer, managing partner at Dynamic Beta Investments, said: "This year CTA fund performance has crushed the rest of the hedge fund industry." He said that as early as January, before the Iran war broke out, CTAs began buying crude oil, achieving early anticipation, contrarian positioning, and accurate judgment; later, before turbulence hit global bond markets, they positioned ahead of time to bet on rising rates.

Beer said by email: "They precisely grasped the market's two main threads: on one hand, extreme stock market optimism driven by the artificial intelligence boom; on the other, market panic over oil prices and inflation. Humans are easily swayed by emotion and find it very hard to time the market; machines are much better at this."

Nicolas Gaussel, chief executive officer and chief investment officer of Metori Capital Management, said CTA funds are able to short fixed-income assets and thereby handle inflationary pressure with ease. He added that the negative correlation between stocks and oil prices was also a major factor boosting this year's performance.

Gaussel said this year's market has been dominated by two structural themes: stocks and bonds showing a significantly positive correlation, while the energy sector is clearly negatively correlated with both stocks and bonds. Such a market environment is very unfavorable for the traditional 60/40 portfolio.

"For traditional long-only diversified portfolios, positive stock-bond correlation is a huge challenge. Bonds themselves have weaker returns and also struggle to hedge the risk coming from stocks. By contrast, CTAs can short bonds and short-term rates, and that ability provides a huge advantage," Gaussel added. "It also reminds us that one of the core strengths of CTA funds is that they do not need to rely on bonds to play the traditional safe-haven protective role."

Kong Yongxin (transliterated), chief investment officer of Maas Investments, believes that toward the end of the year, trend-following fund performance will depend to a large extent on the direction of energy prices and interest rates. He told by email: "The September moves have already sent a signal that the linkage between energy and rates is now transmitting significantly into foreign exchange and equity markets."

"In short, CTA funds can generally serve as a buffer and protection for traditional portfolios, but risk within many CTA portfolios is also becoming increasingly concentrated."