In a red brick office park on the outskirts of Baltimore, one of the oldest algorithmic hedge funds is trying to get faster.
Founded in 1972, Campbell helped popularize computer models that follow months- or years-long trends in futures markets, a niche in the investing industry that has grown to more than $100 billion. Now after years of difficulties for the strategy, the $3 billion firm has increasingly turned to trades with much shorter durations—lasting anywhere from weeks to mere hours.
Such “short-term” strategies emerged as bright spots during an otherwise difficult 2018 for futures trading funds. Campbell says the trades could make up as much as $1.5 billion of capital between its oldest strategy and a new offering managing a wider range of investing styles.
These include wagers on short-term bursts of market momentum and bets that asset prices will move toward long-term averages across bond, commodity, currency and stock markets.
“We want to be very mindful of the capacity of that strategy and maintain a level of assets that will allow the strategies to have an impact,” says Kevin Cole, head of research at Campbell.
Campbell’s shift comes as managed futures funds experiment with new trading methods following years of lagging returns. Winton Group, which manages more than $20 billion, last year reduced the use of trend following strategies by half in its flagship funds. Others, including Man Group, have turned toward esoteric assets such as emerging market interest rate derivatives, exotic metals and cryptocurrencies.
Losses in trend-following funds last year frustrated investors expecting a repeat of positive returns during the 2008 financial crisis. In 2018, the strategies fell more than 8% through December, including nearly 9% when market volatility spiked in February, according to Société Générale data. Campbell’s flagship program dropped 6.4% for the year.
Several funds were hurt by quick market reversals that worked against medium-term momentum signals. One trend following model maintained by Société Générale changed positioning 186 times last year, more than any other time since 2000. Short-term futures trading strategies finished just above flat for the year, according to the bank’s data.
“The fastest strategies got very crowded in futures many years ago. We managed to avoid that by getting slower, but even the slowest strategies I fear are beginning to get a bit crowded now,” Winton founder David Harding said in a television interview this week. “It’s become seen more and more as a beater, as they call it—something that anyone could do.”
Now, Campbell hopes it can attract investors to its Absolute Return funds that incorporate quantitative equity and macroeconomic trades alongside trend following strategies. The fund gained 7.8% last year and was up 2.2% through February.
Investors have been turning away from traditional managed futures funds. Of 260 investors surveyed by Morgan Stanley’s prime brokerage business, just 4% said CTAs would be the best performing hedge funds this year, the least of any strategy.
Campbell says the Absolute Return strategy has received $60 million from a North American pension system since opening to outside investors last year, declining to name the investor. The fund manages about $320 million compared to $2.2 billion in Campbell’s Managed Futures strategy.
Meanwhile in its flagship funds, Campbell has reduced the weight of trend following strategies while increasing the portion of short-term and other kinds of models. Short-term trades contributed to the gains in Campbell’s Absolute Return funds last year.
Cole says Campbell is also researching ways to better balance trend following against competing strategies. The goal is for momentum trades to grow during periods of expanding equity volatility while shrinking during stretches of relative calm.
“We do not see ourselves as a trend follower,” Cole says. “We see ourselves as a systematic investor where momentum is one of many diversified strategies in that portfolio.”
As trend-following strategies struggle, Campbell seeks short-term trades on Absolute Return.