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Kettera Strategies Heatmap February 2020

Short-term and higher-frequency programs generated mixed to positive results as the lightning quick sell-off in equities during the last week caught some strategies off guard. While generally performing well during the first three weeks, with equity markets rising to new highs, a rapid rise in market volatility saw investors quickly re-allocate their assets, faster than many short-term models were able to reverse signals. For most short-term programs, currencies, energies and metals were generally positive, while fixed income was mixed and equities negative.

The theme over the last few months in the global macro realm – discretionary macro doing better vs quant, or model-driven macro – was disrupted in February. Managers in both camps found themselves largely negative for the month, and largely for the same reasons in the same markets, although there are a couple of standout examples among the discretionary global macro group catching the flight-to-safety theme early. The most prevalent culprit was the equities sector, of course – as few managers (or their fundamental models) predicted the timing – and speed – of the late February correction. Long fixed income and interest rates positions were generally quite profitable but not enough for most managers to offset losses elsewhere.

AI and machine learning-based strategies were also swept up in the rapidly rising volatility markets, although, again, there were a few strategies that picked up early on the developing flight-to-quality tremors coming out of Asian markets. Long volatility (including long options) strategies weathered the turmoil fairly well, as they are designed to protect against left tail events.

In February, systematic trend programs (at least the ones that we track) generally had a flat, in some cases, slightly down, month. Most of these programs were off to a banner month about 2/3 of the way in, but as selling hit the equities markets (and investors went on a buying frenzy in bonds) came the big differentiator. In the end, it was hard to find a trend follower – profitable or not - that hadn’t generated gains in fixed income and interest rate markets; most also capitalized in FX to some extent on the fall in the USD. Beyond that, there was a great deal of variation. Those programs that de-weighted equities indices – or with models quick enough to flip direction and get short the indices -  came out with the best numbers.  Of those managers that also trade commodities, it depended on the mix of industrial vs. agricultural exposures:  Trends in the ags being much more troublesome while industrials (especially gold and crude oil in particular) appeared to be the most lucrative.

In equities-based strategies, it comes as little surprise that many long-short generalists posted some of their worst numbers in years, given the beta impact of the stock market decline – although most managers had at least three weeks of gain to cushion the blows.  Event-driven programs also faced a tough final week of the month as spreads widened and more directional positions moved down. Even before the market drop, deal volumes in February were tracking to on par with January – tame, at best -  in sharp contrast to the strong level of deal announcements toward the end of 2019. The equity market neutral category was a mixed bag, with some following the “give it all back” path of their L-S brethren, but with others navigating the month well to end up flat, even slightly up.

Kettera Strategies

For the “style classes” and “baskets” presented in this letter: The “style baskets” referenced above were created by Kettera for research purposes to track the category and are classifications drawn by Kettera Strategies in their review of programs on and for the Hydra Platform. The arrows represent the style basket’s overall performance for the month (e.g. the sideways arrow indicates that the basket was largely flat overall, a solid red down arrow indicates the basket (on average) was largely negative compared to most months, etc.). The “style basket” for a class is created from monthly returns (net of fees) of programs that are either: programs currently or formerly on Hydra; or under review with an expectation of being added to Hydra. The weighting of a program in a basket depends upon into which of these three groups the program falls. Style baskets are not investible products or index products being offered to investors. They are meant purely for analysis and comparison purposes. These also were not created to stimulate interest in any underlying or associated program. Nonetheless, as these research tools may be regarded to be “hypothetical” combinations of managers, HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY PRODUCT OR ACCOUNT WILL ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.

Benchmark sources:

1-The Hedge Fund Intelligence Global Macro Index and HFI Currency Index can be found at: https://data.hfm.global/funds4/public/indices/default.aspx

2-The Societe Generale Trend Index and SG CTA Index can be found at: https://cib.societegenerale.com/en/prime-services-indices/

3-The Societe General Short-term Traders Index: (same link as above)

4-The EurekaHedge AI Hedge Fund Index https://www.eurekahedge.com/Indices/IndexView/Eurekahedge/683/Eurekahedge_AI_Hedge_fund_Index

5-The BarclayHedge Currency Traders Index and BTOP FX Traders Index can be found at: http://www.barclayhedge.com/

6- S&P GSCI Metals & Energy Index and S&P GSCI Ag Commodities Index can be found at: https://us.spindices.com/index-family/commodities/sp-gsci

7-The CBOE Eurekahedge Relative Value Volatility Hedge Fund Index can be found at: http://www.eurekahedge.com/Indices/IndexView/Eurekahedge/641/CBOE_Eurekahedge_Relative_Value_Volatility_Hedge_Fund_Index

8-The Eurekahedge-Mizuho Multi-Strategy Index: (See above)

9-The Eurekahedge Long Short Equities Hedge Fund Index: (See above)

10-Blend of BarclayHedge Equity Market Neutral Index: http://www.barclayhedge.com/ with EurekaHedge Equity Mkt Neutral Index (see link above)

INDICES AND OTHER FINANCIAL BENCHMARKS SHOWN ARE PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY, ARE UNMANAGED, REFLECT REINVESTMENT OF INCOME AND DIVIDENDS AND DO NOT REFLECT THE IMPACT OF ADVISORY FEES. INDEX DATA IS REPORTED AS OF DATE OF PUBLICATION AND MAY BE A MONTH-TO-DATE ESTIMATE IF ALL UNDERLYING COMPONENTS HAVE NOT YET REPORTED. THE INDEX PROVIDERS MAY UPDATE THEIR REPORTED PERFORMANCE FROM TIME TO TIME. KETTERA DISCLAIMS ANY OBLIGATION TO VERIFY THESE NUMBERS OR TO UPDATE OR REVISE THE PERFORMANCE NUMBERS.

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