(Bloomberg) — To the crypto faithful, buying and holding Bitcoin is the only trading game in town — offering about a 50% return so far this year alone for new investments.
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For quantitative hedge-fund investors and a spattering of academic researchers, however, there’s a better way to capture the volatile asset’s rally, while also profiting from the huge drawdowns: Simply follow the wisdom — or folly — of the crowd.
From the world’s largest publicly traded hedge-fund manager, Man Group Plc, to scholars at the University of Cambridge and beyond, a growing body of research signals that the quant strategy of trend following is especially well-suited and profitable for the famous ups and downs in Bitcoin’s price. Quant funds like the $2 billion Florin Court Capital LLC have been implementing such strategies since 2017 and crypto exposure has juiced their cross-asset trend-following trades. For retail traders, a newly-launched ETF is offering wider access to a strategy riding Bitcoin gyrations.
“The risk-adjusted returns of a momentum type strategy, regardless of the speed, have historically been better than one of buy and hold,” said Tarek Abou Zeid, partner and senior client portfolio manager at Man AHL. “Trend following is all about extracting behavioral biases. In crypto, you see excesses, you see FOMOs, you see panics — which can be captured with those systematic strategies.”
Researchers at Man Group’s Man AHL unit found that a proxy long-short trend strategy in both Bitcoin and Ether has outperformed buy-and-hold investments in the coins since 2017 when scaled for 10% volatility. The strategy captures the gains during a rally and takes short positions when the trend is negative.
Man Group, whose assets under management rose to a record $167.5 billion at the end of 2023, has previously said the firm trades cryptocurrencies as part of its existing strategies. Quant-investing giant AQR Capital Management LLC also has publicly said it trades cryptocurrency futures in a trend-following strategy. Florin Court, which specializes in exotic and alternative markets, are trading both Bitcoin and Ether after beginning to trade cryptocurrencies in 2017 and are enjoying a strong boost to the fund’s performance year-to-date.
“Crypto is right up our alley and mostly behaves much like some of the more volatile commodity markets,” said Doug Greenig, the founder of Florin Court Capital. “You need good trend models and systematic risk control.”
Greenig said he is using a conservative approach by avoiding unregulated crypto exchanges and other significant counterparty risks that are infamous in crypto. Relatively small crypto data sets are another issue quants cite as an obstacle to wider implementation of systematic trading. “The biggest concerns have been non-market risks in the space,” Greenig added.
The models Man Group uses rely on data starting in 2016-2017, when institutional investors became more active in the space. Bitcoin futures were launched at the end of 2017.
Academic research adds more evidence to support the case for crypto trend following. A 2023 paper by researchers at Monash University found that trend-following strategies broadly outperformed a constant investment in Bitcoin and Ether, with shorter lookback periods being more profitable than longer ones. Another paper by researchers from the University of Cambridge and beyond found “consistent and attractive returns” for a similar strategy between 2011 and 2019.
Trend Goes Mainstream
It’s not only sophisticated hedge funds examining the strategy. It’s also going mainstream, with investors now able to access a similar strategy through an exchange-traded product. The Global X Bitcoin Trend Strategy ETF (ticker: BTRN) launched last month, tracking the CoinDesk Bitcoin Trend Indicator.
The product dynamically allocates between Bitcoin futures and Treasury bills with a maturity of one to three months. The ETF increases exposure to Bitcoin futures when prices go higher and reduces its allocation when prices move lower, without ever going short.
“Bitcoin remains subject to significant bouts of volatility and large drawdowns,” said Adam Sze, head of product development at Global X ETFs. “BTRN would work best in an environment where there is a clear and steady momentum to either the upside or the downside.”
While trend following has shown good results when tested for Bitcoin and Ether, quants remain cautious about implementing these types of systematic techniques elsewhere in the crypto space. Stablecoins, which are intended to track an asset like the US dollar one-for-one, are obvious examples. So are the highly speculative, often-novelty tokens known as memecoins, which can be way more volatile than Bitcoin and Ether.
“One should be very cautious about applying traditional momentum models to pegged currencies — stablecoins would fall into that bucket,” said Andre Rzym, a partner and portfolio manager at Man AHL. “I’m also cautious about what you might call memecoins – they exhibit price dynamics which might not be suitable for traditional momentum models.”
–With assistance from Isabelle Lee.
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