The Downside of Non-Correlation

Originally published in the Brandywine Asset Management Monthly Report.

Brandywine employs dozens of individual trading strategies to trade across more than 100 global financial and commodity futures markets. The majority of Brandywine’s strategies are based on fundamental, arbitrage, sentiment, event-driven and other non-trend-following approaches (all systematically-applied). As a result, Brandywine delivers returns that are uncorrelated with traditional trend-following CTAs. (Unfortunately), this non-correlation stood out in May, when the major CTA indexes posted gains while Brandywine lost.

Brandywine’s allocation across trading strategies and markets

As you might suspect (by the fact that trend-following CTAs profited in May), Brandywine’s losses came from trades made by our fundamental, sentiment and arbitrage strategies, while Brandywine’s trend following strategies produced profits.

Brandywine’s profits since the inception of the Brandywine Symphony program in July 2011 are the result of the fact that five out of the six strategy-types employed produced profits. Interestingly, the most profitable strategy-type (comprised of five individual trading strategies) was trend-following. So despite the fact that trend-following CTAs have struggled over the past year, that strategy-type has proven to be the most profitable for Brandywine. What this indicates, is that even within trend-following, Brandywine is doing something different.

Brandywine’s drawdown in perspective
Brandywine’s current drawdown began in March 2011. Over the past three months the cumulative decline has equaled -5.51%. This drawdown, in both magnitude and duration, is about as “average” as it gets. Over the 21½ year test period prior to our start of trading last year, the average of our 21 largest drawdowns (a “one-year event”) was -5.49% and the average length was 3.2 months. This doesn’t mean that our current drawdown is at an end, but it is dead-center among expectations based on our back-tests.

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