2013 has been a resurgent year of sorts for trend following programs. The big boys – Winton and AHL have certainly been enjoying the ride on calmer waters after a couple tough years of trading. We’ll even give a shout out (do people still do that?) to Winton for hitting new equity highs last month. That’s quite a feat with $20+ Billion under management.
But it’s a smaller program that caught our eye in May (and truth be told, has been a favorite among staff and clients for some time now). We’re talking about Covenant Capital, whom we spotlighted back in 2011. Covenant managed to post an impressive return of +5.50% in May (our estimate) versus reported losses of -2.40% for Winton and -10% for AHL (ouch!). Now, this is just one month – and with past performance no guarantee of future results, these standings could easily reverse themselves next month or any time after that. But being able to zig like that while the rest of the industry zagged quite a bit the other way is impressive to us.
The million (or maybe even billion) dollar question is whether it’s repeatable – we sure think it is from Covenant’s standpoint and the skill they bring to the equation. But there is also the big boy side of the equation to consider and what may hamper their returns in the future. We’ve covered some of this before here and here, but pictures can often explain a concept better than words – and we felt this one did just the trick:
This is our visual example of nearly $50 Billion of managed futures assets in Winton and AHL trying to get out of a trade at the same time. When the long Nikkei/short Yen trade unwound quickly last month, this was exactly the picture popping into our heads when thinking about how to exit so much exposure to those trends (if they did exit, we don’t know). The worry is that these big boys become too big to succeed.
For our money, we would rather be with a manager who can move on and off the bus freely when they want. We would rather be with a program like Covenant, for whom May is not just a one hit wonder, with Covenant having out-performed Winton in six of the past nine years, and so far again this year after an impressive May. Color us impressed. But don’t start throwing billions at them just yet – we want to keep them performing well in the mid-size range just a bit longer!