My Journey in Finance: My Global Trend Fund

This series introduces my experiences with momentum investing.

• Part 1: Why Momentum Works
• Part 2: How to Build a Momentum Fund
• Part 3: Riding the Escalators
• Part 4: The Momentum Crash

In those pieces, I explain the momentum effect in stock markets and how and why it works. I also outline how and when it can go spectacularly wrong. In this article, I reveal my experience in running a global equity momentum fund during what later turned out to be the worst period for momo investing on record.

On 5^th May 2005, I launched the HSBC Global Trend Fund. It had been several years in the making and was to become the cornerstone of our equity strategy in the HSBC Absolute Return Service (ABS) that I was managing. That service saw assets under management grow to $3 billion with hundreds of accounts from high-net-worth individuals and private clients to sovereign wealth funds.

ABS, not ARS, please, was a portfolio strategy that resembles the ByteTree Soda Portfolio to this day, albeit in a more complex form. My team and I focused on risk-adjusted returns, which means getting bang for your buck. We delivered returns similar to a balanced portfolio but with materially lower volatility.

We achieved that by ensuring funds were allocated efficiently to boost returns and through diversification to reduce risk. The portfolio was diversified in terms of doing many different things, in contrast to a standard (60/40) index portfolio that simply “owns everything”, which is a very lazy form of “diworsification”. In the 2000 to 2008 era, the US market was a deadbeat, and the dollar was sinking. The S&P 500 was a drag on the world index, in an era of global growth. The BRIC nations (Brazil, Russia, India, and China) were driving global markets.

The ABS Portfolios owned gold, commodities, Europe, Asia, emerging markets, frontier markets, government bonds, corporate bonds, convertible bonds, emerging market bonds, CTAs, macro hedge funds, long/short hedge funds, funds of hedge funds, private equity, REITs, and FX. There were many different return drivers, many of which were only loosely related to the short-term movements in the stockmarket. At the time, it was a highly innovative product, and our clients came in droves.

I had this idea that we could make our core equity strategy even more efficient by holding the best-performing companies and not wasting capital holding low-growth stocks that dominated the index funds. I wanted to embrace the momentum effect (momo) and wrap it into a fund that could be allocated across client portfolios. This would be a neat solution that would give us higher returns from global equities for less risk. This was a highly innovative strategy at the time, and AQR, and not many others, publicly embraced momo.

I can remember the stocks we owned in those early days because we hosted a wine-tasting event for our clients. The tables had names such as Apple, Google, Newmont, Haliburton, Vestas, and Fortum, all market leaders and our largest holdings. We got off to a great start, smashing the world index in our first year.

Global Trend Fund vs The World – Launch to 2007

Then, in 2006, the dollar slumped, and our best stocks stalled; even Apple only returned 3% that year despite growing sales by 38%. The US housebuilders crashed, which we didn’t own, and that turned out to be an early sign that all was not well with the US economy. It was an awakening that momo had risks that I hadn’t considered, mainly that the trends tended to do the same thing at the same time. Diversification in the momo world was a pipedream.

Little was known about momo at the time, but I was spooked, and I reduced the exposure of GTF in ABS by 50%, which was one of the best and most selfless decisions I have ever made as a fund manager. That meant my clients had been reduced from 20% exposure to GTF to 10%, and I made that decision without any external pressure. The 10% was reallocated elsewhere.

Fortunately, in 2007, GTF was back on track, and with lower exposure, there was less pressure to succeed. GTF held stocks in fast-growing Asia, emerging markets and commodities. It had zero exposure to financials and real estate. In the US, the banks were down 33% that year, and in Europe, they were down 8% before the global financial crisis had even begun.

2007 was a great year for momo because the winners marched on while the losers slumped and held the index back, which is the best possible outcome. In 2007, the world index rose 7.1%, while GTF rose 28.3%. GTF had banked profits at the Asian peak in November 2007 and was back on top.

Then, in 2008, market breadth was deteriorating (fewer stocks going up), with just 17% of companies trading above their 200-day moving averages by the end of January. Investors were dumping the losers (financials, telecoms, real estate, autos, anything with debt) and chasing the winners (agriculture, oil and gas, gold, mining, and renewables), just like momo investors, but suddenly everyone was doing it, even if they didn’t realise it.

Although GTF was named a “trend” fund, it seemed the whole world latched onto momo to escape from the evolving banking crisis. They did it intuitively. As is always the case at market tops, valuations got out of control, and as Benjamin Graham would say, the stockmarket had shifted from being a weighing machine (value investing) to a voting machine (bubble).

In the summer of 2008, there was much talk of hard assets providing sanctuary as financial assets imploded. Oil tells the story well because it rallied from $50 in early 2007 to peak at $148 in July 2008 on Goldman Sach’s “super spike” forecast. There was much talk of peak oil, and inflation was a concern. The popular trades went beyond oil, and renewables were all the rage. The wind turbine maker, Vestas, was riding high. Investors loved renewables, less so for environmental reasons, although they were still relevant, but because we could no longer afford oil. For economic reasons, the world desperately needed an alternative to hydrocarbons. Energy was the largest US sector, and in the UK, oil and mining made up nearly half of the FTSE 100 by value.

Over the next few weeks, the price of oil crashed to $100 and then came the Lehman Brothers bankruptcy in September. By December, oil was trading at $37. GTF held up well into the summer before the rug was pulled. Then the trends broke simultaneously, as they did in 2006, but this time it was ten times worse. Market breadth had partially recovered in the summer only to fall to 7%. The models found the stocks that were holding up, all defensives such as Coca-Cola and Walmart, and shifted exposure accordingly. In 2008, the world index fell by 42%, while GTF fell by 51.5%.

Global Trend Fund vs The World – 2007 to Closure

GTF was hit hard during the crisis, but many funds fared far worse. Until that point, I had believed that momo was an absolute return strategy because just as you came to the top of one escalator, you could hop on another. If banks were in trouble, we wouldn’t own them; it was as simple as that, and we didn’t. We’d always find new winners.

However, the real problem then occurred in 2009, as the portfolio had been shifting into defensives. Recall that momo is not a static strategy focused on, say, growth stocks. It is a dynamic strategy that aims to optimise exposure to the leading investment themes of the day. That means it is always changing, and when the models changed, GTF changed. Suffice to say, momo works best when the trends are stable.

The issue was that GFT had rotated into defensive companies, which had held up well. That would have made sense if the bear market was to continue for years, as it did in the 1930s, but it didn’t. We’d had the US TARP stimulus package, the bank bailouts, Chinese stimulus, and QE. By March 2009, there had been enough money thrown at the problem to turn the market around, and prices soon soared.

This is why I am one of the world’s leading experts on the momentum crash because I learned the hard way, which is often the best way. If you buy defensive high-quality stocks at the end of a bull market, then congratulations. But at the beginning? Good luck with that. GTF rose but heavily lagged the market, which soared. Having been the king of the castle the previous summer, two successive trip-ups within a year were too much to bear. GTF was too slow to become defensive on the way down and too slow to capture the rally that followed.

At my firm, there was a post-mortem, with no follow-up, as the strategy had been adhered to as described, and there was no foul play. But the goodwill had dried up, and it was decided that it would be best to turn off the models and sit in good companies for the long term. Working in a bank in 2009 was uncomfortable, and I was at HSBC, where people were queuing up outside to put money in, whereas at most other banks, they were queuing to get money out. I can’t imagine what it must have been like at Bank of America, RBS or ABN, who were fighting for their survival. Still, there was no appetite for risk-taking at that time, even in one of the best capitalised banks in the world.

The real casualty was my confidence. Although exposure to GTF within ABS was negligible by this point, these were tough times. The clients were jumpy, as were the relationship managers. Everyone was on edge. Of all the problems around us, GTF was low down on the list, but it wasn’t the time to defend it. GTF, as a momo fund, was curtailed.

Many years after I had done my early momo research, around 2015, the investment banks started to produce momo indices. Today, you can trade winners and losers, go long or short, with hundreds of millions of dollars at the touch of a button. It’s not just momo; they make baskets of stocks for anything and everything. Min volatility, high volatility, high and low beta, heavily shorted, most popular, small caps, quality, election outcomes, war, peace, ageing population, and even vice.

For me, the publication of the momo indices brought relief because when I overlaid GTF, I discovered that I had simply replicated an investment “factor”, which became known as momo. I didn’t know that in 2005, and seemingly, nor did anyone else. With the help from technology and the investment banks, momo is today an easily replicable strategy.

Global Trend Fund vs the Momo Index – From Launch to Closure

A project I had worked on for a decade drew to a close. The thesis made sense right up to the time when the whole market collapsed simultaneously. I would later learn that 2008/9 was the worst momentum crash on record, with 1975 likely a close second. 1975, of course, is the year after the market crash of 1974. Momo crashes occur during the market recovery.

My major concern was always ABS, where 95% of the money sat. It had a reasonable crisis, but not a good crisis delivered by firms such as Ruffer and Capital Gearing. ABS was negatively impacted by GTF, but not by much. Holding the world index instead would have made us 1% or so better off. There were other culprits that cost us money, a topic for another day.

From 2003 to 2008, ABS delivered 10% returns with 4.5% volatility, making it extremely popular with investors. The fall in 2008 was similar to our better competitors and much better than our worst. But the recovery post-2010 was slow because our risk limits were curtailed, and being an active manager in the post-crisis world, it went from being a pleasure to a slog. Still, I carried on for another six years, and this is my ABS track record while at HSBC Global Asset Management. It is a track record jam-packed with events, trades, stories, lessons, people, laughter and sadness, and it is a record that I am proud of, above and beyond the numbers.

HSBC Absolute Return Service 2003 to 2015

In 2014/5, when the world index was flat, ABS did well, and it was a great time to call it a day. I asked for redundancy in 2014, and in April 2015, it was granted. I joined as a young army officer in 1998 and set up the HSBC Absolute Return Service in 2003. By 2008, it had grown to $3 billion at the peak, with the Global Trend Fund by its side. It was one hell of a privilege to hold that position, and I had an education that money can’t buy. It explains why I have such a broad knowledge of financial markets to this day.

I often wondered what would have happened had I carried on with momo. It went on to do well, especially in 2017, 2020, and 2024. Soda held a momo ETF in the first two of those years but not in 2024 because, with record market concentration in big stocks, something doesn’t smell quite right.

Momentum Recovered

After HSBC, I went entrepreneurial and in my first post as a consultant, I took on the editorship of The Fleet Street Letter at Southbank. My personal touch was to launch the Whisky and Soda Portfolios. Soda is essentially the continuation of ABS, but simpler, and probably even better. It aims to match a balanced portfolio, or more, but with less risk. Eight years on, mission accomplished.

Whisky is GTF and then some, with lessons learned. The best trades I’ve had haven’t come from momo but knowing what to do when momo crashes. Cheap, distressed stocks are money-makers, as I have demonstrated several times. I focus less on strong trends these days in preference for early trends. I have always embraced fundamentals, and these days, I rank them above momo.

Investment success over the long term is more about not screwing it up than chasing winners. I believe portfolios should be fundamentally sound, and diversified, but there’s always a little room for a flutter here and there, just keep it small.

In financial markets, you never stop learning, and experience matters. I started as a private investor in 1992 when the UK government sold the water companies. I read the books and learnt as much as I could. When I left the army in late 1997, I sailed to Barbados as crew on a yacht called Wombat. The skipper had fitted Inmarsat, and somewhere in the middle of the Atlantic, I learned that I had passed my city exams. HSBC, or James Capel as it was then called, bravely took me on, and for that, I am very grateful. What a ride it was.  

In the secret Santa at our low-budget Christmas lunch in 2009, I was given a copy of “When Genius Failed” by Roger Lowenstein. Harsh but fair.

A Week at ByteTree

In a busy week, with elections and central banks, I managed to add a high growth stock to the Whisky Portfolio in The Multi-Asset Investor. In a world of sluggish growth, growth stocks do very well, especially when you can find them cheap. That is not something momo understands because the trend is your friend, and price doesn’t come into it.

Bitcoin just made an all-time high on the back of President-elect Trump’s victory, who has become a fan. It was also the end of the month, so our BOLD Index was rebalanced.

Finally, in crypto, we highlighted how dire things were ahead of the election. Fortunately for the coiners, the Donald has their back.

Have a great weekend,

Charlie Morris
Founder, ByteTree