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Analyzing managed futures exposure
December 1, 2008
It was more of the same in November, with continued losses in stocks, commodities, currencies, and more as the credit crises/next Great Depression continues to unfold.
Industrial Metals -6.98%
(% Loss = average of top markets in each sector, Crude Oil, Unleaded, Heating Oil, and Natural Gas in the Energy sector, for example)
But as we saw in September and again in October – the managed futures asset class bucked the trend, posting gains amongst everyone else’s losses again in November. Because of their exposure to both up and down moves, managed futures have managed to better nearly every other asset class in 2008.
How have they done this? Well, they essentially caught the move up in commodities in the first half of the year, went through a small losing period as those trends turned over, and then caught the move down in commodities, stocks, and foreign currencies.
Aset Class YTD Performance
Managed Futures +14.27%
Hedge Funds -18.20%
US Stocks -44.41%
World Stocks -48.80%
Real Estate -51.10%
Key: All results estimates as of 12/01/08 Managed Futures = Credit Suisse/Tremont Managed Futures Index, Cash = 3 mo T-Bill rate, Bonds = Vanguard Total Bond Market ETF, Hedge Funds = Credit Suisse/Tremont Hedge Index Commodities – Reuters/CRB Commodity Index, Real Estate = Dow Jones Wilshire Real Estate Securities Index, World Stocks = MCSI World Index, US Stocks = S&P 500 Index
As we have been hammering home repeatedly for the past several weeks, it pays to have managed futures exposure during times of market stress. They may underperform during the good times for stocks and bonds, but that seems a small price to pay when we’re in a period like we are currently in where it is the only game in town. (Past performance is not necessarily indicative of future results)
And here’s the great part – managed futures can even perform well during good times for stocks. They aren’t a complete hedge – meaning they won’t always make money when markets are down, and they won’t always lose money when markets are up. They are what we call an absolute return vehicle, which strives to make money whether the market goes up or down. This small point is an important one for those considering moving stock market money over to managed futures until the market “starts going back up”, then rotating it back over to stocks. Owning stocks and being in a managed futures program are not mutually exclusive – you can have success(or losses) with both at the same time.
Managed Futures Exposure
Many of you have been calling into Attain saying, “I get it” and “I want to add managed futures, let’s do it”, and so on. This is great, and we congratulate you on the foresight for diversifying into this truly non correlated asset class, as has been shown during market crisises in the past and again this year.
But before you pat yourself on the back too hard, there is one important step to take. Make sure your managed futures investments are giving you managed futures exposure!
What? How can a managed futures investment not give you exposure to managed futures? What kind of double talk is this?
All you have to do is consider one type of managed futures program, Option Selling CTAs, to see how not all managed futures programs give the same performance and diversification benefits that is represented by the managed futures indexes Attain and others espouse as “Managed Futures Performance”.
Option Selling CTAs like Ascendant Asset Advisors are technically managed futures programs, as the manager is registered as a professional commodity trading advisor, and trades are placed in individually managed accounts. But the similarities end there. Ascendant is down more than -70% this year because they are a short volatility program which sells options on stock index futures. That means they are usually going to go down when stocks go down, and usually go down a lot when stocks go down a lot. That is in stark contrast to the stats on managed futures programs, which usually go up when stock markets go down, and usually go up a lot when stock markets go down a lot.
So if you are using the managed futures index data at the top of this article and elsewhere out there on the internet as the reason to put money into managed futures - it isn’t enough to just get into any old managed futures program.
You need to be aware of how “like” the index your CTA choice is. Most of the time in this newsletter we’re talking about finding the holy grail of no correlation, but in this case – if looking to replicate the crisis period performance of the managed futures indices – we’re saying you want to be as highly correlated to the index as possible.
Now, one easy way to do that without doing a bunch of math is to find out which CTAs are in the various managed futures programs, and simply invest in those. But unfortunately, many of the programs which are used in calculating the various indices are either closed to new investors and/or have minimums of $5 Million to $50 Million for an individually managed account.
Another way is to invest in a managed futures program which does roughly the same thing as the CTAs within the index. This still requires some research and work to find out which CTAs are in the index, and often times that information is hard to obtain or not available at all. But Attain has done that work, and can tell you that most of the CTAs in the various indexes are systematic multi-market CTAs. (View our recent newsletter on this type of CTA here)
And this makes sense from a top down view, as those types of managers generally have a long volatility profile, which is designed to perform well during times of spikes in global volatility (such as happens during market stress periods like we’re in right now)
Is your CTA correlated with the managed futures index?
In fact, we’ve listed the top 7 CTA programs on our recommended list in terms of correlation between their monthly returns and a blended Managed futures index (CSFB from Jan. ’94 to Dec ’00, and the Newedge Index after that) in the table below, and you can see that those programs most correlated with the managed futures index are indeed systematic multi-market CTAs like Chesapeake, Clarke Capital Management, and Attain Portfolio Advisors.
Correlation with Managed Futures Index
1. Chesapeake 0.67
2. Clarke Worldwide 0.62
3. NuWave 0.57
4. Clarke Global Magnum 0.51
5. APA Strategic Div. 0.46
6. APA Modified 0.46
7. Clarke Global Basic 0.45
Source: Barclay’s CTA data, Credit Suisse/Tremont CTA index, Newedge CTA index
But is it enough to simply be correlated with the managed futures index? Should you simply invest in those managers most highly correlated with the managed futures indices? This comes down to a personal choice, but many feel they don’t just want exposure to the managed futures index – they want to outperform it.
If looking to outperform the managed futures index, wouldn’t the ideal scenario be to do well when the index does well, but then also do well when the index does poorly? Or put another way, to be highly correlated to the index when the index has winning months; but somehow be either negatively or zero correlated with the index when it has losing months.
To test which managers have a knack for doing well when managed futures are doing well, but not necessarily struggling when managed futures struggle, we looked at the correlation for each of our recommended CTAs during up months for the managed futures index and down months for the managed futures index.
Up Correlation Down Correlation .
Clarke Worldwide 0.51 ACE -0.40
Chesapeake 0.49 Zenith Index -0.30
APA Strategic Div. 0.46 APA Modified -0.24
NuWave 0.44 APA Strategic Div. -0.11
Clarke Global Magnum 0.44 DMH -0.09
Clarke Global Basic 0.38 Pere -0.04
APA Modified 0.28 Rosetta -0.03
Rosetta 0.17 Dighton -0.02
Dighton 0.13 Cervino 0.01
Zenith Index 0.10 FCI 0.10
ACE 0.09 NDX Shadrach 0.10
Crescent Bay 0.02 Clarke Global Basic 0.28
DMH -0.01 Clarke Global Magnum 0.30
Cervino -0.19 NuWave 0.32
NDX Shadrach -0.31 Chesapeake 0.35
Pere -0.33 Clarke Worldwide 0.40
FCI -0.44 Crescent Bay 0.48
Source: Barclay’s CTA data, Credit Suisse/Tremont CTA index, Newedge CTA index
The results were mainly to be expected, with most of the short volatility option selling and discretionary CTAs showing up as negatively correlated to both the down and up months for the index (doing well when managed futures do poorly and vice versa), and most of the systematic multi-market managers showing high positive correlations to both the up and down months (meaning they did poorly when the index did poorly and well when the index did well – the definition of correlated).
The interesting programs were those non option sellers which were positively correlated to the up months in the managed futures index while being negatively correlated to the down months (the ideal scenario we spoke of earlier). These programs were Attain Portfolio Advisors Main and Modified programs, Dighton Capital, and Rosetta.
In closing, if you are looking for the diversification benefits and outperformance of the stock market during stress periods represented by managed futures indices’ historical returns – make sure your managed futures program is actually giving you managed futures exposure. If it isn’t, you may not be getting the diversification you think you are, or worse – doubling up on the risk in your traditional portfolio.
IMPORTANT RISK DISCLOSURE
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Economic turmoil not only in the U.S. but globally continued to take its toll in November, although some signs of relief late in the month gave some hope of a recovery. The unstable climate continued behind headlines of more institutional bank problems and bad economic releases, but announcements by the new Obama administration regarding key cabinet posts seemed to give the overall market some glimmer of hope with a late month rally in most sectors.
Even with a bounce higher at the end of the month, inflation/growth sensitive products were especially hard hit, as evidenced by the energy sector. RBOB Gasoline shed -20.97%, Crude Oil lost -20.62%, Heating Oil was down -18.36% and Silver -7.79% lower.
The credit crunch remained a big factor on weaker Stock Indexes price action in November. The small cap sector was especially hard hit with Russell futures down -14.35% and Mid Cap futures shedding -9.68%. The large caps followed suit as the tech heavy NASDAQ lost -14.35%, S&P futures fell -7.55% and Dow futures ended -5.24% lower.
Activity in Currency futures last month continued on the path of factoring in a global slowdown, although at a much slower rate than the past few months. The Japanese Yen +2.89% and U.S. Dollar Index +.53% seemed to attract money despite falling rate yields in each country. The Swiss Franc took the most brunt of the pressure -4.58% and the tone was reflected in the performance of other Europeans as the British Pound shed -4.31% and the Euro lost -0.25%.
Flight to quality buying supported Rates futures and actually spurred a daily record move in one instance. 30-year Bonds gained a hefty +12.61% and 10-year notes ended up +7.84%.
Metals activity was a bit fractured during November as the precious metals uncovered gains on hard assets purchases by nervous investors with the industrial metals falling on pressure from hard global economic times. Gold +12.24% led precious metals higher followed by Platinum +5.85% and Silver +4.89%. In the Industrials Copper lost -10.21% and Palladium fell -3.75% as economic indicators continue to point weaker world demand.
The Food and Ag sectors mostly remained under the weather on worries of lost demand due to ideas of economic slowdowns across the globe, although there were a few that did post gains most notable the Cocoa +9.56% due to weather issues in the top growing regions. Ag sector losses were led by Corn -12.89%, Cattle -7.81% and Soybeans -5.84%. Food sector losses started with Orange Juice -6.79%, Coffee -1.51%, Cotton -1.38% and Sugar -1.01%.
Multi-Market managers kept up the pace and finished November strong last week. Long treasury futures and short stock index / energy trades propelled many managers to profits this month. Trends continue to be strong allowing manages to remain profitable despite the spike in short term volatility in markets like 10 year note futures, SP futures, and Crude Oil futures. For the month Hoffman Asset Management was the top performing manager with gains of approximately +6.15%. Congratulations to Mr. Hoffman on a fine month.
Next in line where two programs from Clarke Capital Management which saw gains of approximately +5.63% in the Clarke Global Basic Program and estimated gains of +5.17% in the Clarke Global Magnum Program. Following Clarke was the Attain Portfolio Advisors Strategic Diversification Program with estimated gains of +2.78% and the APA Modified Program with approximated returns of +2.26%. Finally Dighton was up approximately +0.23%.
Multi-Market mangers in the red include Lone Wolf with estimated losses of -4.57% and Robinson-Langley at approximately -1.86%.
Finally the index traders had mixed returns this month with MSLO making +0.54% (est) while Pere was down an estimated -1.50%.
As we have reported in the past, option trading mangers come in all shapes and sizes but are generally lumped into two categories - Short volatility (option seller) and Long volatility (option buyer). To recap - the past year has been difficult for anyone who falls into the first category (option seller). November was no exception as volatility levels continued to push up on historic levels. Short volatility estimates for November: Ace Investment Strategist -13.25%, Crescent Bay PSI -1.2%, Crescent Bay BVP -1.94%, FCI +0.87%, Rathiel -4.74%, and Zenith Resources at 0.00% (they remained out of the market for the whole month).
In the long volatility category - It is important to note that none of the mangers that we track are 100% long volatility; however, as we have noted in past newsletters, Cervino Diversified Options is an option "trading" manger that focuses on both long and short volatility positions. For the month Cervino 1x was ahead +0.15% and Cervino 2x was up +1.59%. Returns that won’t knock your socks off, but quite an accomplishment considering where the other option CTAs were last month. Looking at their current positions we'll be looking for this trend to continue on through the end of the year.
Outside of options, agriculture and grain managers struggled in November as many of the fundamental market trends continued to be out of line with historical price action. For the month here are a few estimates: NDX Abednego -0.87%, NDX Shadrach -4.36%, and Rosetta -5%. Looking ahead it will be interesting to monitor how quickly the fundamentals bounce back in line with the cash market prices heading into the year end.
While there was plenty of volatility in October, there wasn’t much variety in the trading environment from day to day. It was mainly all down, down, down. But unlike October, November’s market movements were quite varied, with five percent declines followed by ten percent gains; markets trending in one direction for several days, then oscillating for several more. In short, systems had exposure to all types of conditions throughout the month, giving them the opportunity to produce positive results regardless of the type of strategy employed.
Beginning with the day trading systems, Rayo Plus Dax was leaps and bounds ahead of all other systems with profits of +20,312 € for the month of November. Waugh eRL took the second spot at +$5,842 for the month trading 4 times a week on average, significantly more active than the other day trading programs. Compass SP posted its third consecutive positive month with +$1,404 on a limited amount of trades (9 for the month). Rounding out the other programs was BetaCon 4/1 ESX with losses totaling -500 € for the month after a strong October.
Moving on to the swing systems, Jaws US 400 and AG Mechwarrior were neck and neck, up +$3,423.70 and +$3,342.50 for the month respectively. On the losing side, Jaws US 60 dropped -$581.40, Mesa TY -$1,389.16 and Ultramini ES -$1,407.50 all on a closed trade basis.
In long term trading, trend followers were pleased to see a continuation of the long trend in bond markets, as well as good entry points for re-entering short in various commodity markets after a relief rally late in the month. Look for several programs to reach their profit objectives if the trends continue in December, but a sharp reversal could also leave long-term traders vulnerable to losing large amounts of open trade equity as the “bands” continue to widen.
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.