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Quantitative hedge fund strategies are outperforming the stock market this year, using algorithms, statistical models, and machine learning technology to identify major price trends. Their gains have come from decisive moves across bonds, currencies, commodities, and equities.

Trend following hedge funds, also called commodity trading advisors or managed futures strategies, use computer based programs and price signals to process huge volumes of information. The funds build positions across futures markets rather than depending on a single asset class.

These strategies seek large and persistent trends moving either upward or downward. Their ability to take bullish and bearish positions across equities, bonds, commodities, and currencies allows them to pursue momentum wherever it appears.

Societe Generale’s SG CTA Index, the sector’s principal performance benchmark, gained 15.7% during the nine months through the end of the third quarter. The broad based S&P 500 advanced 11.7% over the same nine month period.

The index tracks daily net returns from major strategies, including funds operated by Man Group, PIMCO, AQR, and Winton Capital. Its lead over the S&P 500 reflected successful positioning around several of the year’s largest market moves.

Industry professionals said CTAs correctly anticipated September’s abrupt bond selloff by shorting U.S. Treasurys. The funds also benefited from earlier bullish positions in the dollar and long oil positions established before the Iran war.

“CTAs are crushing the rest of the hedge fund world this year,” said Andrew Beer, managing member at Dynamic Beta Investments. He described the sector as “early, contrarian and right.”

Beer said the strategies began buying crude oil in January before the Iran war. They later positioned for rising interest rates ahead of turmoil across global bond markets, capturing another major trend.

“They’ve nailed the two major themes in the markets: on the one hand, feverish AI-driven optimism about equities and, on the other, panic about oil prices and inflation,” Beer told CNBC via email.

“Humans are too emotional to time markets. Machines are much better.”

Nicolas Gaussel, CEO and CIO of Metori Capital Management, said CTAs effectively navigated inflationary pressures because they could take short positions in fixed income. That flexibility proved valuable as bond performance weakened.

Gaussel also identified the negative correlation between stocks and oil as an important factor supporting returns. He said this year featured a strong positive correlation between equities and bonds, alongside a strong negative correlation between energy and both asset classes.

That combination created a difficult setting for traditional 60/40 portfolios. Bonds delivered weak performance while providing less diversification against stock market exposure, limiting the defensive benefit investors ordinarily sought from the asset class.

“For traditional long-only diversified portfolios, the positive correlation between equities and bonds has been particularly challenging. Bond performance has been weak, while bonds have also provided less diversification against equities.”

“By contrast, the ability of CTAs to go short bonds and short-term rates has proved very beneficial,” Gaussel added.

“This reminds us that one of the key strengths of CTAs is that they are not dependent on bonds playing their traditional defensive role.”

Performance for trend following funds heading toward year end will probably depend on energy prices and interest rates, according to Yung-Shin Kung, chief investment officer at Mast Investments. Those forces have become increasingly important across other markets.

“If September provides any indication, we’re at a point where linkages between the two are now propagating meaningfully into currencies and equity markets as well,” Kung told CNBC via email.

“The upshot is that CTAs are generally well positioned to buffer traditional portfolios — but the risk in many CTA books has grown increasingly concentrated.”

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.