Yung-Shin Kung – Credit Suisse – Trend following in Managed Futures

Yung-Shin Kung is a managing director at Credit Suisse. We recently caught up with Yung, who will be speaking at our 4th Annual Liquid Alternative Strategies Summit (May 1 – NYC), as he explained their approach to trend following in the Managed Futures space.

JV Events Group: How do you differentiate your fund from other funds in the Managed Futures category?

Yung-Shin Kung: The Managed Futures category encompasses a range of systematic and discretionary investment strategies. In general, these strategies focus on trading liquid futures contracts. Our approach to Managed Futures is distinctive in three key respects:

1. Our team and the global resources of Credit Suisse Asset Management. Our group has been a pioneer in liquid alternative investing since the late 1990s when we launched our Credit Suisse Hedge Fund Indices. Our Managed Futures strategy, published as the Credit Suisse Managed Futures Liquid Index, was launched in 2011, and is used by several leading institutions as an investible benchmark for trend following. We have strong governance, including independent market and operational risk management, and a deep team of technologists dedicated to optimizing our systems infrastructure.

2. Our focus on pure trend following. We employ a systematic investment process which seeks to capture price trends across a diverse set of instruments, asset classes, and geographies using a broad spectrum of signal time horizons.

3. Our emphasis on cost management. We designed our Managed Futures program to focus on the most liquid and relevant segments of the futures market and to limit unnecessary trading with the objective of minimizing trading costs which can be quite substantial for many Managed Futures strategies. In addition, our Managed Futures strategy is offered at a much lower price point than traditional hedge funds (several of which the strategy has outperformed on a net performance basis) while preserving daily liquidity and a high level of transparency. We believe that careful cost management results in better outcomes for investors over the long-term.

JV Events Group: What dynamics are driving Managed Futures right now?

Yung-Shin Kung: The vast majority of performance within the Managed Futures category is attributable to trends – up or down – in the prices of bellwether instruments across major asset classes. Our program focuses on these trends which we believe are most relevant to investors from a portfolio diversification standpoint.

Recently, the market has been highly attentive to progress in policy normalization among developed market central banks and to the implications of fiscal legislation in the US and synchronous global economic growth on inflation and interest rates. Our Managed Futures program has been sensitive to the re-pricing of nominal interest rates and exchange rates, and to moves in benchmark equity and commodity prices. We believe that the path of economic data and interest rates will remain an important dynamic for our Managed Futures strategy for the foreseeable future.

In general, market regimes which feature trending asset prices are supportive for Managed Futures strategies, while those that produce trend reversals or sideways price trends tend to be the most challenging. Our Managed Futures strategy seeks to produce more consistent returns by allocating across a diverse range of asset classes, thereby reducing its dependence on stable price trends in any one instrument or asset class.

JV Events Group: How do Managed Futures complement traditional assets?

Yung-Shin Kung: Investors commonly allocate to Managed Futures strategies to improve the efficiency of their portfolios. In contrast to many other investment strategies, investment decisions in our Managed Futures strategy are not predicated on any assessment of asset valuation. Rather, our program evaluates instrument-level price trends over a spectrum of timescales to determine whether instruments are appreciating or depreciating and takes long or short exposures consistent with the belief that the direction of such price movements will persist.

There is a rich body of academic and practitioner literature demonstrating the existence of trends in asset prices. Explanations of what gives rise to trends generally draw on the work of behavioral economists, pointing to the effects of common cognitive biases- such as anchoring, confirmation biases, and herding – among investors in driving the evolution of asset prices. Institutional incentive structures and policies may also perpetuate trends.

Because our Managed Futures strategy employs a systematic investment process utilizing input data distinct from that used in most traditional investment strategies and because the program’s criteria for going long or short instruments is very different from most long-only strategies, its performance has generally had a low correlation to that of traditional assets such as stocks and bonds. In fact, Managed Futures strategies have historically generated relatively strong performance in some of the worst periods for risk assets such as equities, highlighting their potential value in complementing traditional asset holdings and improving portfolio diversification.

JV Events Group: Thanks Yung. We look forward to hearing more of your thoughts at the 4th Annual Liquid Alternative Strategies Summit May 1st in NYC.