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July 18, 2018  

Trend-Following Issues Take Toll on ISAM

ISAM, a commodity-trading advisor whose trend-following program traces its origins to Man Group, is mired in a prolonged drawdown.

The $3.5 billion ISAM Systematic Trend Fund has fallen 30.5% since reaching its high-water mark in February 2016. Year-to-date, it was down 14.1% at the end of June, following a 1.7% gain last year and a 20.4% decline during the last 10 months of 2016.

The only other time the London firm performed so poorly was a 31-month drawdown that ended in September 2013, during which its fund fell 34.8%.

The latest stumble is taking a toll on ISAM’s assets, reversing several years of robust growth. The Systematic Trend Fund more than doubled in size during 2017, from $2 billion in February to $4.2 billion at yearend. But during the first half, it contracted by about $700 million.

ISAM trades some 220 commodity and financial futures, aiming to capture mid-term trends on the long side while placing short-term bets when its computer models signal prices will fall. It’s a highly volatile strategy, producing profits of 62% in 2014 and 77.8% in 2008. This year, a 5.3% gain in January was followed by a 13.1% loss in February — the fund’s worst-ever monthly result. It also lost 6.9% in May.

On an annualized basis, the ISAM Systematic Trend strategy has returned 10% since 2001, with volatility of 18.4%.

ISAM’s performance in the past two years reflects the difficulties trend-following CTAs have had in general. Consider that through June 30, the SocGen CTA Index had fallen 12.9% since its peak in February 2016. A 6.3% decline for the index in February was its worst monthly showing in about 17 years.

Global-macro professionals point to a variety of reasons for the underperformance of systematic strategies including trend-following programs. One source said a key factor has been a flood of money from retail investors into markets once occupied largely by hedge funds. In particular, CTA returns have been diluted by heavy retail investment in exchange-traded funds, he said.

ISAM traces the roots of its trading strategy back to 1981, when Larry Hite’s Mint Investments pioneered the use of trend-following techniques in the futures market. A few years later, Hite formed a joint venture with London-based Man Group that lasted 15 years. The success of that business led Man to acquire a controlling interest in another trend-following CTA called AHL, which continues to be a centerpiece of Man’s offerings.

Stanley Fink, who was chief executive of Man from 2000-2007, helped form ISAM in 2008 and served as the firm’s first chief executive. In 2010, ISAM acquired the track record to Hite’s strategy and launched the Systematic Trend Fund.

Fink now serves as chairman of ISAM, working alongside two other former Man executives: Alex Lowe, once head of product development at Man, and Darren Upton, who ran a research team for AHL. Lowe is co-managing partner of ISAM, while Upton serves as chief investment officer. The other co-managing partner is Roy Sher. Alex Greyserman, a long-time Hite staffer, also holds the title of chief scientist at ISAM.

Man’s AHL unit now runs four strategies. The largest, the $5.3 billion AHL Dimension, was down a relatively modest 2% this year through June 30. Both its annualized return, 5%, and volatility, 8.6%, are lower than ISAM’s.

ISAM also runs a futures-focused prime-brokerage business called IS Prime, as well as a risk-management advisory called IS Risk Analytics.