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Global Volatility on the Rise

April 28, 2008

 

The list of successful multi-market CTAs over the past 12 months has been impressive; with managers doing everything from short term trading on commodities markets to traditional trend following seeing gains of that period.

Successful multi-market + trend following CTAs (past 12 months)

 

If you’re looking to pat your multi-market manager on the back, go ahead and do so – they have definitely displayed skill in capitalizing on the extreme movements in the commodity markets. But at the same time – the past 12 months has been just what the doctor ordered for these types of programs which usually have a long volatility profile. Just as we noted in last week’s newsletter how the past year was a very tough environment for option selling CTAs with their short volatility profiles, the past year as been a great environment for CTAs who thrive off of increased volatility.

Just how good of times has it been? Consider that each April, Attain compares the 200 day volatility on approximately 80 markets we track against the 200 day volatility for those markets in the year ago period. As can be seen in the table below, since 2004, there have consistently been more markets which saw a decrease in volatility year of year than an increase – with only 13% of markets seeing increases in volatility 04/05, 43% in 05/06, and 28% in 06/07.

It’s no coincidence that multi-market/trend following models generally struggled during those same periods; and its no coincidence that over the last 12 months when these models have been doing very well….94% of markets saw a year of year increase in volatility. 94%!! That is how good of an environment it has been, one in which 9 out of every 10 markets have seen more volatility, which can equal more opportunity.

Annual Increases in Global Market Volatility:

 

Which markets have highest volatility?

Knowing that volatility has risen is only half the explanatory battle here, the other half is knowing which markets have seen that rise in volatility. Which are among the most volatile markets? The answers below may surprise you.

We are used to seeing the energy markets on the top of any list of volatile markets, and perhaps would expect to see some of the stock index future markets atop a list of most volatile markets given the spike in volatility we have seen there due to the credit crunch.

But would you believe that once rather tame markets like Wheat, Sugar, and Soymeal have all been more volatile than the notorious Natural Gas in the past year? I couldn’t believe it.  The rapid rise in global commodity consumption along with the weak US Dollar has resulted not just in a sudden increase (or inflation) in commodity prices, but in some pretty extreme day to day movement in those prices.   

Emerging economies such as India and China are consuming more commodity products than ever before.  Furthermore their hunger for products like grains and gasoline doesn’t seem to be subsiding anytime soon.   This has resulted in a classic lesson in supply and demand for the rest of the world.   Tighter supplies along with increased demand have resulted in higher prices for everyone and perhaps even tougher times down the road for some.

Unfortunately we cannot ease the burden of these higher costs at home or even predict when the prices for everyday items like pasta and rice will begin to level off.  However what we can do is tell you what markets are moving the most and where the best trading opportunities may lie for your trading system or portfolio.  Of course, it will be hard for over 90% of markets to see an increase in volatility over the next 12 months.

On the flip side, a glance at the table below may tell you which markets you may want to avoid if you are more risk averse.  The list of traders who were surprised by the volatility in wheat futures includes the CBOT, which raised the daily limit move for Wheat last year without also raising the margin. (meaning they made it so the market could move adversely against you,  more than you had to deposit in order to trade it)

A quick glance at the chart below should tell you why prices for bread and pasta are on the rise.  Just look at the increase in the volatility that both the Chicago and KC Wheat markets have seen over the last 10 months.  In comparison, both the SP 500 and NASDAQ futures markets aren’t even represented on this list, even though the media would have you believe that stock market volatility is out of control

Considering volatility in your Due Diligence:

What does all this information mean for your portfolio?  At face value, it can mean relatively nothing as market volatility rises and falls all the time and is not necessarily reflective of any one CTA or trading system investment.   However, if you are considering an investment in a CTA that specializes in trading a limited set of markets like agriculture, livestock, or even stock indexes, it is wise to note that market parameters have changed significantly over the last 10 months.  This can impact the risk profile of an individual CTA or trading system that focuses on small, select group of markets to trade.  Thankfully most multi-market CTA’s and trading systems like trend followers use volatility filters to exclude markets that are more volatile in an effort to preserve capital. 

In conclusion when performing due diligence on newer CTA’s or trading systems at Attain we always ask the manager or trading system developer the following volatility related questions right off the bat and you should too:

1.) What percentage of equity do you risk per trade?

 2.) What is the largest loss seen by the system/CTA’s model in a single market in real time and hypothetically in back testing?

 3.) What is the max intra month drawdown in both real time and back testing?

 4.) How do you or the system manage risk and changes in market volatility?

For a more complete list of questions or to have us perform due diligence on a CTA or system you are considering investing in please contact us anytime at invest@attaincapital.com .

- John Cummings

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Energies hit new all time highs, Dollar sees rare weekly gain | Chart of the Week

Overview

Supply disruptions were the name of the game in the energy sector during the past week pushing Natural Gas to levels not seen since late 2005, and sending Crude Oil near the $120 level. A workers strike in the U.K. halting refining operations shutdown a major North Sea pipeline and a strike coupled with attacks on a pipeline in Nigeria severely limited production. Gains for the week in the energy sector saw Natural Gas +3.5%, RBOB +2.3%, Crude +1.5% and Heating Oil futures climbed +.25%.

Stock futures posted slight to moderate gains last week as they continued to climb the wall of worry helped mainly by earnings releases that were at or just better than analyst estimates. Stability in the marketplace came on news of better earnings figures from the financial sector as American Express indicated it expects to meet their annual forecast despite a first quarter loss which was less than anticipated. There were a few bright spots in the tech sector as well with most companies results in-line or better than estimates, although Microsoft did see pressure on lower a lower outlook for later in the year. For the week SP futures gained +.51%, NASDAQ futures were up .81%, and Dow Jones futures gained +.50%. In small cap trading the Russell 2000 futures +.56% and SP Midcap 400 futures +1.50%.

Currencies & Bonds had a slow week of trading - although the US Dollar did finish the week with gains against most continentals. US Dollar Index futures were up +1.1% for the week as investors seemed to start moving money into U.S. dominated markets, especially the stock market as stability has been improving. Euro Currency futures finished the week down -1.1%, Swiss Franc futures were up -1.7% and British Pound futures lost -1.1%. In bond trading the benchmark US 10 Year Note futures finished the week -.98%, and the US 30 Year Bond futures were off slightly as the sector awaits the monthly FOMC meeting and Unemployment report next week.

Commodities were mixed, although inflation sensitive markets were under pressure last week as it seemed investors rotated out of this investment class and moved to the stock sector. In the metals Gold futures -1.70% and Silver futures were down -5.57%. In the grains Soybeans were down -3.01% while Wheat futures -7.96% and Corn -3.73%. In other food sectors Sugar futures lost -7.98%, while in the livestock sector headed higher as Live Cattle gained +1.23%, and Lean Hogs up +3.72% on strong foreign demand.

CTAs

With just three trading days left in the month, we can get a pretty good picture of where the majority of CTAs will end up April with numbers through the end of last week.

Amongst option selling CTA’s, they had a strong week of performance last week as market vol continues to decrease, playing right into the hands of those selling volatility. It looks like ACE +3.49%, Ascendant +0.87% Cervino Diversified +0.87%, Diamond Capital +0.51%, FCI +1.66%, Raithel +0.45%, Zenith Index +0.47% and Zephyr Aggressive +0.19% all appear that they will post positive numbers in April, barring a market meltdown over the next two days. On the downside, Zephyr Moderate continues to struggle, and looks like they will finish April in the red at -0.93%.

Trend following and Multi Market advisor performance has been mixed as many commodity & futures markets are seeing their huge trends to the upside (downside for the US Dollar) start to lose steam.

The Longtermtrading.com Navigator program has managed to gain +6.07% behind its short term models in April, to lead the way. It is followed by Dighton Capital , which is up +3.62% for April after its long dollar position finally saw some gains last week.

Elsewhere in multi-market managers, Vision Capital has bounced back slightly from its March woes, gaining +1.83%, while Hoffman Asset Management is near breakeven at -0.01%. Both the APA Strategic Diversification -2.59% and APA Modified Programs -2.36% are looking like they will finish April in the red barring a rally in the next two days. Northside Trading looks to be bringing up the rear in April at -11.71%.

The Ag & Livestock traders were mixed as well with Chicago Capital out in front with returns of +8.95%. NDX Shadrach +0.79% is also up while NDX Abedengo is near breakeven. Finally Rosetta is down -2.30% thus far in April.

Trading Systems

Last week yielded mixed results for day and swing trading systems as many investors are sitting on the sidelines ahead of this week’s Fed meeting which finishes up on Wednesday. The week’s top performers were mostly swing systems, and of those systems the majority of them were either long equities or short bonds.

Signum TY was the top performer across all systems with profits of +$2,156 for the week. The system entered the week short (2 contracts) and cheered on the lower treasury prices with the Ten Year Note finishing the week on the lows. Jaws US 60 was close behind with open trade profits of +$1,187.50 on a short trade it entered into on Wednesday. Tzar ES returned a more modest +$450 in open trade equity on its long position. Ultramini YM found success with its short term trades that made +$425 for the week. Tzar NQ saw small gains of +$81.46 in open trade equity on its short position despite the broader mkt moving higher thanks to weakness in the tech-heavy Nasdaq.

Those swing systems that were negative last week included Tzar eRL which was down -$250 on its short position and Mesa Notes which was down -$940.62 on its long TY position.

Elsewhere, day trading results were mixed with Kappa 12/1 Dax as the top performer with profits of +$461.21. Waugh eRL lost -$204 on three trades for the week. BetaCon 4/1 ESX lost -$406.23 on two trades while Compass SP lost -$2,050 on two trades.

Trend following systems were quiet but have started to unwind long treasury/short equity positions. Another trend that has started to reverse is the short US Dollar/long foreign currency trades. Finally, trend following systems are starting to bail on their short livestock positions, particularly in Hogs and Feeder Cattle. Look for exits in these positions if these markets continue to move against the trend.

IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.

Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.