In the days of British Rail, in the depths of winter, there was a particularly notorious excuse for tardy trains: the wrong type of snow on the lines.
So it is too with some of the world's biggest hedge funds. The snow, in their case, is volatility.
So-called managed futures funds, also known as CTAs, are running into their fourth successive year of disappointing returns. The average CTA, which uses complex computer algorithms to spot and ride market trends, has lost more than 7 per cent in the past two years alone, according to Hedge Fund Research.
While hedge funds in general have hardly fared well, they have fared better, averaging losses of about 1 per cent over the same period.
The "wrong volatility" in question is the "RoRo" – risk on, risk off – phenomenon, involving high correlations across asset classes, usually linked to political announcements or central bank interventions, which has dominated markets in recent years.
CTAs, which typically look for trends in futures markets to spot and ride, are the biggest losers from it.
In the RoRo environment, such trends quickly reverse, causing painful losses. Worse, the prolonged volatility often causes the computers running CTAs automatically to reduce their leverage, meaning that even when they are making money, it is far less than it should be.
Even the best and biggest CTAs have been hit.
The flagship fund of London-based Winton Capital, the largest CTA globally, made 6.3 per cent last year, but as of the end of September was down 3.9 per cent for 2012.
AHL, Man Group's flagship CTA, meanwhile dropped 6.8 per cent last year, and is only just flat for 2012. Geneva-based BlueTrend, run by the Brazilian-born quantitative analyst Leda Braga, made just 0.32 per cent last year, and was up just 2.3 per cent for 2012 as of the end of September.
In spite of such lackluster numbers, however, many CTA managers themselves are sanguine.
"It has happened before," says Sushil Wadhwani, former member of the Bank of England's Monetary Policy Committee and founder of Wadhwani Asset Management, a CTA part-owned by leading global macro hedge fund Caxton Associates. "In October 2004, people would constantly tell me that macro and CTAs were dead."
As Mr. Wadhwani notes in recent research, CTAs have weathered far worse two-year drawdowns in the past, and bounced back. In June 1984, for example, CTAs' two-year rolling return was minus 18 per cent. The return for the next two years was 67 per cent.
CTAs, says Mr. Wadhwani, typically follow periods of poor performance with periods of very good performance.
"Right now there are a lot of trigger points around the world that could either result in things becoming a lot worse or getting a lot better," he says. When that happens, CTAs stand to be among the biggest gainers. "The beauty is that they should make money either way it goes."
A major selling point for CTAs has been as a form of insurance, a concept underscored by events in 2008, a year in which almost all other global asset classes, regular hedge funds included, plummeted, but the average CTA made 20 per cent.
Be that as it may, some in the industry remain cautious. "We are a little more cynical about selling ourselves as insurance," says Matthew Beddall, chief investment officer at Winton Capital. "CTAs are not a silver bullet."
For Mr. Beddall, the value is in long-term, statistical outperformance. Winton recognizes, and is clear with investors, that there will be down years – about two in every 15. CTA investments, it follows, will truly pay off only in the long haul and, as Mr. Wadhwani notes, should be expected to endure periods of losses.
All of which is not to say managers are not scrabbling for ways to try to succeed in the current environment. Part of the problem is also one of size: as CTAs have swelled to manage hundreds of billions of dollars, so too must they look for ever deeper, more liquid markets in which to trade.
"One of the things we have certainly been seeing is that not all markets are being affected by the European sovereign crisis and the actions of western central banks equally," says Matthew Sargaison, chief investment officer at AHL. "Diversification has always been one of the key arguments for CTAs."
Equity strategies, credit trading and foreign exchange are all areas beyond traditional futures markets that the biggest CTAs are now looking to, in an effort to help "future-proof" themselves, and kick-start returns. "We are looking for markets that are somewhat orthogonal [to traditional western ones]," says Mr. Sargaison.
CTAs' efforts are not altogether falling on stony ground. Growing numbers of institutional investors are again looking to them.
And in an environment where the safest bonds themselves are yielding so little, CTAs have a receptive audience to sell to, in the form of pension funds and institutions desperate to diversify out of fixed income but uncomfortable with the volatility equities suffer from.
"Why is so much money going into safe haven bonds and, relative to that, so little going into CTAs?" asks Mr. Wadhwani. "It genuinely puzzles me."