A $300 Billion Quant Trade Wins in ‘Almost Unbelievable’ Market

(Bloomberg) -- Wall Street's great reopening trade is reviving a $300 billion quantitative strategy that's surfing the reflation-driven momentum across global markets.

With rising expectations on economic growth fueling trends in everything from Treasuries and oil to stocks, Commodity Trading Advisors just notched one of their best months since 2000.

These trades acutely tied to the business cycle may have more room to run as Covid-19 cases fall and fresh U.S. stimulus kicks in.

“It's truly trend-following at its best now,” said Nicolas Mirjolet, chief executive officer at Quantica Capital, a $750 million Swiss CTA, which is up around 9% so far this year. “The environment right now is almost unbelievable in terms of the consistency, the strength and persistence of trends that we see across asset classes.”

While the Treasury rout may be inflicting fear and loathing across Wall Street, it's been a boon for Quantica as the firm profits from one of the biggest bond shorts in its 16-year history.

CTAs, which use the futures market across assets, climbed 5.2% in February as of Thursday, a Societe Generale index shows. That's the among the 10 best months in data going back to 2000. It signals a reprieve for an industry caught out by the 2020 market whiplash.

“Rising inflation environments are good for CTAs,” said Kathryn Kaminski, chief research strategist at quant firm AlphaSimplex. “You have a lot more movement and it's relatively disruptive.”

The pro-growth market regime was ignited in early November when progress on a coronavirus vaccine was first announced. That set off protracted streaks of gains and losses for a large number of assets -- a regime ideal for trend followers, which typically trade a variety of derivatives with a medium-term view.

After last week's historic rout, Treasury bears just had their best run since 2016. CTAs are the most bearish on long-dated bonds since at least May 2019, data provided by Dynamic Beta as of Thursday show.

Rising growth expectations have also fueled huge gains for commodities with the likes of corn and soybeans up roughly 50% in the past year. On a six-month rolling basis, both offered higher risk-adjusted returns, or Sharpe ratios, than the famously high-flying Bitcoin, according to Quantica.

Even beyond CTAs, momentum traders have dominated this year as the retail cohort rush into speculative stocks in the cheap-money era. Think GameStop Inc., blank-check firms, Tesla Inc. and Cathie Wood's theme-driven funds.

Still, CTAs have a long way to go to redress a woeful decade of underperfomance in which they lagged both asset benchmarks and hedge funds. While bullish bets on bonds have been lucrative since 2009 amid loose monetary policy and sluggish economic growth, trends in other asset classes have proved far less durable.

Much will now depend on the longevity of the reflation trend. Already, there have been some signs of a reversal, with CTA performance taking a hit on Thursday when commodities and stocks fell.

Still for now, these quants are still seeing plenty to like.

Andrew Beer's iM DBi Managed Futures Strategy ETF, which imitates CTA exposures, has been adding oil longs and increasing bearish bets on long interest rates, their data show.

“A true regime shift in inflation would be very, very good news for managed-futures funds,” said the co-portfolio manager.

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