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Alternative Market Briefing

Adaptability rewards this trend-following hedge fund

Monday, October 19, 2020

Francois Bonnin
B. G., Opalesque Geneva:

Trend followers, who buy an asset when its price trend goes up and sell when its trend goes down, expecting price movements to continue, have experienced fluctuating fortunes since 2009 partly due to greater correlations and choppiness in markets.

But trend following is still an effective strategy, says a French asset manager, so long as one knows where to find the trends.

The Cyril Systematic Fund, which became a UCITS in 2011, is a trend-following fund that systematically invests in global futures markets. Share class I is up 4.5% YTD (to end Sept.) and has annualised 6.7% since its July 2000 inception with an annualised volatility of 14%, with only five down years. It was up 9% YTD in Q1-2020.

In this strategy, the managers employ multiple trend detection techniques over multiple time horizons to a diverse basket of futures markets. They equalise risk across all contracts through the use of real-time volatility measures. And they employ a dynamic risk management tool to analyse risk factors such as rising correlations and reversal risk at the portfolio level. The average holding period of the fund is approximately three weeks.

It is managed by John Locke Investments, which is based near Paris. The firm is named after the famous 17th c. philosopher, who was considered one of the first of the British empiricists.

CEO and founding partner François Bonnin will be speaking at the second episode of the Diversification Matters webinar series on October 27th at 10 am EST.

An adaptable trend following strategy

Bonnin started his trading career as a proprietary trader for a French investment bank where he managed arbitrage between equity warrants, convertible bonds and equities, according to Coquest. With time, he understood his trading's edge would eventually wear thin. So he built technical indicators. "I created software applications that would take advantage of inefficiencies," Bonnin says. "[I] stopped my personal trading to concentrate on constructing trading systems and a research platform. That is how I came to be a systematic trader."

He then worked at ING and at another alternative systematic asset manager before founding John Locke in 2000. Following the 2008 credit crisis, he reviewed his trend-following strategy, which exploited the small bias towards trendiness over noisiness, to include more diversification across de-correlated assets.

As most assets are increasing behaving similarly, he reworked the allocation method to include risk to diversify it dynamically, and he introduced composites - groups of markets that represent a theme that can be traded as a single market.

Now the firm trades 40 of the most liquid-diversified futures markets and an additional 110 composite markets that the managers have created.

"These composites have completely different behaviour than outright futures; they have a life of their own that reflects something else than what can be seen through a single major future market," Bonin explains. "For example, the S&P 500 or the STOXX Europe 600 reflects how good each local economy is doing but they don't reflect how good they are doing relative to each other. Is one doing better than the other? This is an entirely different question; this theme has a life of its own and it is uncorrelated to these standalone instruments."

These composite markets have provided additional alpha for the fund. 2014, 2016, 2017, and 2019 for example were double-digit years.

Bonnin does not believe that trend following is over, but, he says, "the approach to trend following had to be understood and modified to navigate new conditions."

September uncertainties

The fund posted a -5.9% loss in September. "The uncertainties linked to the Covid-19 epidemic are still dominant, despite signs of economic recovery observed over recent months," says a John Locke monthly report. "Also, the growing tensions surrounding the US elections, the absence of significant new initiatives from central banks, or the exuberant valuation of technology stocks, have contributed to significant market volatility this month."

Trend followers' performance has been fickle in the last eleven years. This year is no better. According to the FT last month, the quantitative trend-following hedge fund industry, which manages $280bn, has experienced widely diverging fortunes. Aspect Capital, Millburn, and Winton Group were down about 7%, 12%, and 17% respectively. Roy Niederhoffer's Diversified Fund and the Tewksbury Investment Fund had gained roughly 44% and 18% and Man AHL's trend funds were up 3 to 4%. The disparity is partly explained by the swiftness and depth of the market drop and then recovery, says the paper, but also by whether trend followers branched out into other quant trading strategies or whether they reacted quickly to market moves and looked at longer-term patterns.

Meanwhile, SocGen's SG Trend Index was up 2.2% YTD at the end of July, and was down -2% YTD at the end of September.



François Bonnin will be speaking at the second episode of the Diversification Matters webinar series, where Opalesque presents investment managers who not only were up or protected in Q1-2020, but also YTD and in previous years.

To view the webinar, please click here:
- Registration (free):
- Time: Tuesday, Oct. 27th 2020, at 10 am EST

You can replay Episode 1 as well as other group and sole manager presentations here:

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