As gold and silver prices continue to fluctuate, some in the hedge fund industry are looking for opportunities in the precious metals’ wild swings. A Commodity Trading Advisor (CTA), also known as a trend-following or managed futures fund, is a computer-driven investment strategy that trades investment trends across a variety of futures markets, including stocks, bonds, currencies, and commodities. These strategies use a complex combination of statistical models, machine learning algorithms, factors, and other quantitative signals to identify and bet on market ups and downs, removing human emotion and bias from the investment process. These systematic models have rode the momentum of precious metal price gains in recent months, helping trend-following quantitative funds recoup losses suffered during last year’s Liberation Day turmoil. And despite sharp reversals in both gold and silver, the sector’s performance has held up. @GC.1 1Y Mountain Gold Futures. Société Générale’s SG CTA index, the CTA sector’s main performance benchmark, rose 5% in January. Meanwhile, the SG Trend Index, which tracks the daily performance of 10 trend-following hedge funds, rose 6.9% through Jan. 29. This made January one of the best months for the index since 2000. Both benchmarks are up more than 4% year-to-date as of February 4, suggesting that trend-following quantitative managers are successfully weathering the wild swings in gold and silver. “Agile and Flexible” So how do they achieve this? “CTA is nimble and flexible,” said Andrew Beer, managing member of Dynamic Beta Investments. “Last week’s sharp reversal in gold and silver will put many at risk, but most will still bet on further upside,” Beer said. “The CTA was right about gold and precious metals as a contrarian early on. Last Friday’s reversal merely gave back some of the gains.” Industry insiders explained how the various signals and models underpinning the algorithm are helping the precious metals industry weather rough waters. Short-term trading models (small trading windows and chasing short-lived trends) are designed to enter and exit trades early, while medium- and long-term models are often more sensitive to larger, more meaningful movements, such as a weaker yen, a stronger gold, or a rotation into non-US stocks. This can help you avoid the sharp blows of sharp declines and increase your returns. John Caprice, founder and CEO of PivotalPath, a data provider for the hedge fund industry, said intermediate-term trend followers, which make up the bulk of his firm’s managed futures index, generate consistent performance across several factors, including long bets on precious metals. “Although gold and silver ended the month with significant declines, gold still rose 9.3% and silver ended the month up 11.2%,” Caprice told CNBC via email. “In fact, most strategies have reduced their positions in precious metals since September as volatility continued to rise, thus mitigating some of the losses during sudden reversals while making significant gains on the way up.”Meme TradingMeanwhile, silver is emerging as a “meme trade,” making it a poor fit with many trend-following models. That may have led many strategists to limit their exposure and ultimately avoid a decline in the white metal. “Good meme trading requires low prices and low liquidity, which is inconsistent with what most trend-following strategies require,” said Yong-Shin Kun, partner and chief investment officer at Mast Investments. “These are really the prerequisites for successful memetic trading, and silver has those characteristics.” @SI.1 1Y Mountain Silver Futures. He said in an interview with CNBC: “In this low price, low liquidity environment, if you can get enough people together, you’re going to see this explosive return on investment. But a lot of CTAs were probably excluding silver completely because silver doesn’t have the liquidity that it naturally seeks. So silver is certainly surging, but if you didn’t include silver in January you’re missing out… There’s a lot of awareness among professional money managers and CTAs about silver and the illiquidity that exists there. ” Nicholas Gaucel, CEO and CIO of Metri Capital Management, also said that the silver pullback ultimately had a “limited impact” on industry performance, which remained resilient. “This shows that the CTA is currently benefiting from trends in not only metals, but also other sectors such as agricultural contracts, some currencies, and equities,” Gaussel told CNBC. “The second quarter of last year was a very unfavorable environment, but in the fourth quarter a combination of trends and diversification made the environment quite favorable.” Market experts said this highlights CTA’s ability to not rely on a single factor and adapt to different market environments. “CTA performs best when the world changes significantly,” Beer said, calling the sector an “attractive diversifier” for stocks and bonds. “January was filled with strong macro trends: surging gold and silver, rotation in US stocks, and strong currency movements. If this continues, CTA could have a historically good year.”
