Momentum trading, though struggling in recent years, should not be shunned as it has shown success over the long term and can be a source of alpha in times of market stress.
This is the view of Thomas Zimmerer, global co-head of Allianz Global Investors’ multi-asset team, who told delegates at Investment Magazine’s Absolute Returns Conference that he had favoured this style of investing for more than 15 years. Even so, he also conceded that momentum trading had produced poor results over the last ten years and noted that largest ten US commodity trading advisors had lost money over that period.
Still, during a panel discussion, Zimmerer argued that momentum-driven investing is far from dead but added that manager selection was critical to success. “Momentum is a long-term risk premium so it is important to be patient,” he said, adding that investors could see negative returns for as long as five years. While Zimmerer thinks there is still room for returns to be “better than average” with momentum trading, he agreed with panellists that data suggests efficacy is falling over time.
During the session, panellists discussed what kind of investment strategies and financial instruments could best be employed to monetise volatility spikes.
Vimal Gor, head of bond, income and defensive strategies at Pendal, said they think about monetising volatility rather than trading implied volatility. “Using systematic processes to override human instincts, we feel at moderate levels, volatility is quantitative rather than a qualitative phenomenon. At the extreme tail volatility is a qualitative issue, 5 to 15 per cent is the sweet spot for quants, above that it takes a different skill set.”
Gor said credit and volatility are arguably becoming the same thing, as most nations are experiencing zero cash rates and negative yielding sovereign bonds.
“This period has seen central banks around the world lose control of inflation expectations,” he said. He pointed to the massive growth in credit markets where the triple-B bond market has reached $US3.5 trillion and the high yield market now worth $US1 trillion. “Some of this growth has been through corporate financial engineering to sell into the demand for paper with weaker covenants.”
The bond specialist anticipates that at some point in the future, countries will hold a debt amnesty and cancel across the ledger balanced items through a coordinated response by the G7. Gor also highlighted the growth in short value programs. “JPMorgan estimates that 50 per cent of futures activity is hedging short volatility programs.” Overall, the bond specialist told conference-goers they should diversify in the next 12 – 24 months as bonds become less appealing.
For Andrea DiCenso, who is vice president and portfolio manager at Loomis Sayles, the current returns per unit of volatility make risk unattractive.“The questions is how to dial up or down the beta,” she said.
Loomis Sayles has engaged MIT PhD graduates to carry out a major piece of research on credit markets, which DiCenso said was necessary given the accommodative stance of central banks. “It’s no longer about fundamentals or economic data –you need market factors driving returns factors up or down for every asset class on a daily basis,” she said. DiCenso also said allocating funds to the high yield market is “not enough” and that funds need to know where they are taking risk.