A rare bright spot in investing in 2022 was strategies that follow trends in markets rather than fundamentals, including the AlphaSimplex Managed Futures Strategy Fund that returned more than 32% for the year.
(Bloomberg) — A rare bright spot in investing in 2022 was strategies that follow trends in markets rather than fundamentals, including the AlphaSimplex Managed Futures Strategy Fund that returned more than 32% for the year.
Kathryn Kaminski, chief research strategist and portfolio manager at AlphaSimplex Group, joined the “What Goes Up” podcast to discuss the firm’s strategies and what she’s expecting in 2023. One development she anticipates that could make investors uncomfortable this year is the likelihood that inflation bottoms out at around 4%, rather than the Federal Reserve’s target of 2%.
Here are some highlights of the conversation, which have been condensed and lightly edited for clarity. Click here to listen to the full podcast on the Terminal, or subscribe below on Apple Podcasts, Spotify or wherever you listen.
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Q: Last year was great for trend-following. Tell us about that.
A: Last year was phenomenal. For someone like myself who’s been in the managed-futures space for years — this space is a place where there’s definitely clumpy returns — but we do really well when there’s massive trends, when there’s dislocation, when things are uncomfortable. And last year was definitely uncomfortable — particularly fixed-income. And I’ve been really fascinated by fixed-income last year as well. But other things were exciting too.
Q: You said 2022 was a banner year for trend following and for the “pigs fly trade.”
A: If you think about fixed-income, most people think of it as a tried-and-true investment. They think if things go wrong, fixed-income’s there for me. So, that’s that classic 60/40. Last year was the first year where we had to think about the concept of rising rates, where we had to think about present value of bonds actually being affected. And so, you saw a very, very negative year for fixed-income. And this was a tremendous short trend.
But this hasn’t worked for almost 40 years and most of us haven’t been trading in the markets for 40 years. It’s basically an artifice of history. So, for us who trade systematically, seeing those trends and actually trading short in fixed-income was doing something that most people wouldn’t dare to do. But we are quants — we follow where the opportunities are, and that was a very, very profitable opportunity last year, being able to short bonds as central bankers raise rates to fight inflation.
Q: January is a weird month. We see reversals that sometimes don’t last. So, how are you thinking about this month? Is it sending a signal about what we can expect for the rest of the year or is this kind of a head-fake?
A: There’s been so many positive things at the beginning of this year. People were not expecting things to be as positive as they’ve been. But if you really look at it, there’s a couple key factors. First of all, many investors got beaten up last year. They took their money out of the markets. They’re waiting for that signal that things are OK and I gotta get in. So, they were underinvested coming into the beginning of the year.
Number two, we’re seeing some moderation in inflation, which is a positive signal that we’re going to eventually find a way to go on hold and potentially stabilize some of the inflation situation that people are dealing with.
And number three, we’re seeing positive news in Europe and also in Asia, particularly China, which is suggesting that things can get back to normal at some point. So, there’s this optimism that is flooded by several good factors. The thing to be aware of is that there are a lot of positive signals, but at the same time, inflation is still very, very, very far from the target, which means that central bankers — who don’t always think like the markets, who think a little more long term — are still going to have to fight that fight, and that fight may not be over as quick as people think. And I think that’s what we’re seeing in terms of why it’s such a positive January.
Q: What are you expecting in terms of volatility this year?
A: What’s happened is people have been a little nervous. Perhaps it was what happened last year and just kind of getting over that. They’ve been expecting a choppy first half and a positive second half. We’re probably more in the camp that you may see the opposite. So, you’re going to see a choppy second half of the year when we actually realize that inflation doesn’t fall as quickly as we like. If we actually see inflation bottom and come back up — and we’ve seen some early indications recently that central bankers are holding, but inflation isn’t moving low enough — that’s where that could be a more challenging second half of the year. The reality that this takes a lot longer than we would like.
Q: What in your view do you think the Fed does if we do have the downturn in inflation topping out at 4% or 5%, let’s say?
A. Well, the challenge for the Fed then is, do they say, ‘Hey, we can’t get to our goal.’ Or, do they say, ‘Well, let’s just change the goal.’ And so, either of those are not very positive. I think the more positive one, which everybody would like, is to go back to 2% and have things sort of be stable. But I think the challenge is the likelihood that we’re going to end up at 4% or so, and then the question is, the Fed either has to say, ‘Well, we’re no longer going to try’ or, ‘We’re going to have to keep trying.’ And people are not going to like that either. So, I think that’s the challenge.
–With assistance from Stacey Wong.
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