Trend Follower Aspect Capital Rolls with the Punches

After some recent difficult years, the London-based firm makes the case for its strategy as a liquid diversifier for institutional investors.


Chris Ratcliffe

Many asset managers suffered in the third quarter of this year, when stock and commodity markets plummeted worldwide. But for Aspect Capital, a $5 billion specialist in systematic trend following, it was a good time. The London-based firm’s $860 million Aspect Diversified Fund achieved a 14 percent return by shorting energy and metals.

Aspect uses computer-based models to identify incipient market trends and jump on them. The Diversified Fund’s recent performance built on a strong 2014, when it gained 32 percent by going short on oil and long on bonds such as German Bunds and U.S. Treasuries at the right time.

But Aspect CEO Anthony Todd and president and research director Martin Lueck aren’t resting on their laurels. They remember the tough times of 2012 and 2013, when a lack of sustained rises and falls in most markets led to losses of 10.7 percent and 4.4 percent, respectively, for the Diversified Fund. The strategy also slumped by 9.7 percent this April, thanks to a sharp reversal in equity markets that bucked the trend of rising prices identified in Aspect’s models. Thanks to its strong third quarter, the fund was still up 3.1 percent for the year at the end of October.

Todd and Lueck helped pioneer trend following in the U.K. in the 1980s and co-founded Aspect back in 1997, but they still think they have a lot to learn about how market trends work. “Trend following forever requires updating and evolution because markets evolve,” Lueck explains. Hence the 68-strong research and development team he watches over — more than half of the firm’s 114-member staff.

Mostly aimed at global institutional investors and funds of hedge funds, but also at individual high-net-worth clients through distribution partnerships, the Diversified Fund is part of Aspect’s Diversified Programme strategy, which accounts for the bulk of the firm’s assets. This strategy also guides: $3.47 billion in separate accounts; the $486 million Aspect Diversified Trends Fund, a European mutual fund under the UCITS structure that includes a mix of institutional and retail money; the $85 million Aspect Institutional Diversified Fund; and the $32 million Equinox Aspect Core Diversified Strategy Fund. The latter two vehicles are an ERISA-compliant offering for U.S. retirement plans and a ’40 Act mutual fund, respectively.

The UCITS fund, which Aspect primarily sells in Europe, has proved particularly attractive to multimanager diversified growth funds and wealth management firms. The ’40 Act fund is available to U.S. institutions, but its main target is U.S. platforms that can distribute it to retail investors and their advisers.

Todd and Lueck’s experience as trend followers goes back much farther than the founding of Aspect. The two men studied physics together at the University of Oxford with another bright student named Michael Adam. After graduation, Lueck and Adam went to work for Adam’s father, a sugar importer based in London.

One day in 1983, “old man Adam handed his son a book of technical trading models and said, ‘See if there’s anything in these,’” Lueck recalls. “So together we developed some rudimentary computer models and discovered trend following.” They had unwittingly reinvented the wheel: “We didn’t know there was already an industry doing this in the U.S.,” Lueck says.

Four years later Lueck, Adam and fellow trend-following expert David Harding founded London-based Adam, Harding and Lueck, a trend-following investment house, where Todd came to work as head of financial engineering and product development. AHL’s client base was predominantly high-net-worth individuals, along with some funds of funds; the firm attracted relatively little direct institutional money.

In 1994 the firm was acquired by Man Group, the U.K. alternative-investment giant. Man AHL, as it’s now called, manages $17.9 billion, or nearly one quarter of parent Man Group’s assets.

Lueck and Harding departed AHL in 1996, Todd the following year. In 1997 Harding founded London-based Winton Capital Management, a trend-following commodity trading adviser that is now one of the world’s biggest hedge fund firms, with more than $30 billion in assets.

Todd and Lueck decided it was time to bring the systematic trend-following approach to the institutional investor community. “We started Aspect with the belief that this should be in every institutional investor’s portfolio,” Lueck says.

When making the case for why institutions should care about trend-following funds, Todd doesn’t cite performance. But since its 1998 inception through this August, the Diversified Fund had posted an 8.8 percent average annual return, compared with 5.6 percent for the CISDM CTA Equal Weighted index, a measurement of returns for commodity-trading advisers, which pursue trend-following strategies. “It’s a liquid source of diversification for clients’ portfolios — it’s that lack of correlation that is good,” Todd asserts.

The fund’s average correlation with stocks is “pretty much zero,” he estimates, but the correlation is “dynamic”; it changes depending on the trend that Aspect is following. Todd explains that the firm’s trend-following strategy hinges on pinpointing and acting on medium-term trends of two to six months, using an automated system based on the principle of serial autocorrelation, or “the tendency for today’s price movement to be slightly influenced by what happened yesterday and what happened last month.”

The Diversified Fund trades in about 190 highly liquid financial instruments in 150 markets, most of them futures contracts, including those for stock indexes such as the S&P 500, commodities like Brent crude and interest rates.

Aspect’s trend following can involve shorting or buying into markets. For example, the Diversified Fund generated a 25.4 percent return in 2008 by shorting equities and commodities and going long fixed-income. At other times the fund has switched into a positive correlation with stocks, purchasing them on the expectation that they will rise.

Aspect, which opened New York and Hong Kong offices in 2004 and 2008, respectively, has attracted a diverse range of clients. About 60 percent of the firm’s assets come from institutions, including pension funds, insurers and sovereign wealth funds, with another 20 percent from funds of funds and the rest from distribution deals with wealth managers and private banks. Europe accounts for about 40 percent of total assets, with another 30 percent from the Middle East, 15 percent from Asia and 15 percent from North America.

If the unique selling point of trend following is diversification, Aspect must keep turning over fresh stones to find it. “The world has become a slightly more homogenous place over the time I’ve been doing this,” Todd says. “Correlations between different markets have gone up over the past 20 or 30 years.”

His solution: Keep going into new areas that are not yet highly linked with global financial markets. With that goal in mind, Aspect’s research team is doing simulated trading in Chinese futures contracts that were until recently barred to foreign investors, including plastics, glass and eggs. Besides offering diversification, such instruments meet the firm’s other key criterion: “These contracts are extremely liquid,” Lueck says.