Managed Futures end 2008 as top performing asset class
January 5, 2009
While the final 2008 numbers are still a few weeks away from being tallied on some asset class indices, we couldn’t wait that long, and have compiled the following estimates of 2008 performance across the various asset classes followed by most investors. Most people only know stocks and bonds, actually; not alternative investments in commodities, hedge funds, and managed futures; so perhaps we should say the asset classes followed by readers of this newsletter.
Past Performance is Not Necessarily Indicative of Future Results.
| Asset Class | 2008 Performance |
| Managed Futures | 17.59% |
| Bonds | 2.93% |
| Cash | 0.08% |
| Hedge Funds | -20.72% |
| Commodities | -23.74% |
| US Stocks | -38.41% |
| World Stocks | -42.08% |
| Real Estate | -43.12% |
Key: All results estimates as of 12/31/08 - 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 you can see in the table above, managed futures finished the year on a strong note, not just surviving the financial crisis which hit markets in 2008, but thriving in it with double digit gains close to +20%. When comparing that with assets like cash and bonds which just barely survived at 0% and +3%, or supposed absolute return vehicles like hedge funds at -20%, or stocks and real estate which lost nearly one half of their value in a single year – the power of diversifying into managed futures has never been more apparent. (Again, the obligatory disclaimer that past performance is not necessarily indicative of future results)
Just how powerful is this diversification? Imagine a US stock portfolio in 2008 which had 20% of its value in managed futures. The portfolio containing managed futures would have lost just -27%, versus the stock alone portfolio losing -38%. That may seem like cutting hairs as they were both still down significantly, but the portfolio including managed futures would have lost about $110,000 less on a million dollar portfolio, for example. I don’t care who you are, that is still a significant amount of money, and that is still enough for a year of college, or perhaps not having to postpone retirement another year, and so on.
Managed Futures = The Crisis Investment
While managed futures have long been regarded as risky investments for those targeting oversized returns, this year’s results should go a long way to pointing out that it is their low correlation with traditional asset classes which helps managed futures investments be not just return enhancers during the good times, but also volatility reducers during the bad times.
We outlined this non correlated performance of managed futures during periods of market stress in a September newsletter, which we encourage you to review if you haven’t already. While past performance is not necessarily indicative of future results, once again; it is impressive to note that the current financial crisis is the 5th consecutive time since 1990 that managed futures have seen positive performance during a market “crisis” The other four crises were the Surprise Fed rate hike of 1994, the Russian bond default/Long Term Capital Mgmt blow up in 1998, Tech Crash of 2000-’02, and 9/11 tragedy.
What is it that allows managed futures to perform during market crises? It helps to take a step back and understand what exactly managed futures are to answer that question.
Managed futures describe investments into futures trading accounts managed by professional Commodity Trading Advisors (CTAs). As you would expect with their title including the word ‘Commodity’, CTAs specialize in trading commodities. This allows them to provide diversification into a true alternative asset class. In contrast, hedge funds are not a true alternative asset class as they often trade the very stocks and bonds you’re attempting to diversify away from.
Because commodity markets move in reaction to global supply and demand, not the future cash flow of corporations, they are not at risk from the stock price declines, liquidity issues, and credit problems which until now, nobody understood tie together hedge funds, stock, bond, and real estate investors.
But don’t make the mistake of thinking that managed futures investments are the same thing as commodity investments. Participating in an oil/gas partnership, owning a commodity ETF, or buying futures on Corn are all outright commodity investments, and all can perform poorly in a weak economy/recessionary environment as the price of commodities goes down.
The difference between investing in managed futures (which trade commodities) and investing in outright commodities; is that managed futures don’t just go long commodities. That is, they don’t just rely on commodity prices going up, up, and away, like the long only commodity indexes and ETFs which everyone was running to get into in 2007 and early 2008. They can make money on commodities when they go up AND when they go down. (and sometimes when they go sideways).
In addition, because there are futures markets on things which aren’t really commodities at all, like stock indices, bonds, currencies, and even weather – managed futures programs can give exposure to bear markets (and rallies) in these financials. The rally in the US Dollar in September and October, for example, was behind most of the +80% gains for the Clarke Global Basic managed futures program in 2008 (-29% all time Max DD), and the compound annual return of more than 25% for the Paskewitz Asset Mgmt program is due entirely to futures on the S&P 500 stock index. Past Performance is not necessarily indicative of future results.
How do I get involved?
So how do you go about getting managed futures exposure in your portfolio. Well, the first step is finding a partner like Attain to work with. You could spend a lifetime doing the research and due diligence on prospective managers professional CTA firms such as Attain have already done. Be sure to do your own due diligence, but make it easier on yourself with professional help. It doesn’t cost you anything extra, so why not use it.
Important side note here: Do Not pay upfront fees. They are not industry standard and they will negatively affect your overall returns. Click Here for our past newsletter on how Up Front fees can cost you.
How much of an investment am I looking at here? Because of the natural leverage already built into futures contracts (1 contract of Corn can be traded with as little as $2,000 in an account, but controls over $20,000 in Corn, for example), managed futures minimum investments are not in the stratosphere like hedge fund minimums. In fact, there are opportunities in managed futures for as little as $50,000.
Now, $50,000 will likely only get you into a single manager, who may or may not do as well as the managed futures index or even be attempting to trade in a manner which would be similar to the index. Much in the same way you should diversify your entire portfolio, we highly recommend investing in as many CTA programs as you can afford to with your managed futures allocation. There is just no telling when a single manager may enter a poor environment for its particular trading style, whereas the chance of several non correlated managed futures programs in a portfolio all entering a poor trading period at the exact time are much lower (but still greater than zero).
Generally speaking, the more managed futures programs in a portfolio – the greater the odds that your portfolio will mimic the managed futures index in achieving crisis period performance. There is also the ability to us notional funding to increase the amount of money you’re having CTAs trade for you while keeping the cash level the same. Read our newsletter on notional funding by clicking here.
The naturally begs the question of what percent of a total portfolio should be allocated to managed futures. We wrote a recent newsletter on this topic which you can view here. But the gist was between 20% and 50% (use the amount of cash invested, not the nominal value, for these calculations) depending on your risk tolerance and view of where the overall markets go from here.
A few caveats:
Now, as we’ve said in this past newsletter, make sure your managed futures program is replicating the indices as closely as possible if your decision to invest in managed futures is based off trying to get the crisis period performance shown by the various managed futures indices. Don’t make the mistake of investing in an option selling CTA and thiking that will give you the non correlated performance of the managed futures index. It will not, it will only compound losses during a crisis.
Having said the above, not all managed futures programs even attempt to replicate the index, and there are several good ones which trade different things quite successfully as shown in our past newsletter (click here). These should be added to a portfolio of CTAs, and not be traded on their own in a managed futures portfolio in our opinion.
Along those same lines – if you are looking for something with a little lower minimum which can do well in a high volatility environment, Trading Systems also did well in 2008. There is unfortunately no independent third part index to reference for their performance. But from what we have seen at Attain, where the founders started tracking trading system performance nearly 10 years ago; this is best environment for systems we’ve seen since 2000/2001 period. Click here for more information on trading systems.
Where do managed futures go from here?
Can managed futures keep outperforming traditional asset classes like stocks and bonds? Can they outperform their alternative investment brethren on the hedge fund side for another year?
Nobody knows for sure, and it is impossible to tell what will happen based off what has happened. Consider that hedge funds (as represented by the CSFB/Tremont Hedge Index) had 9 winning years in a row until their loss of -20% in 2008. Or how US stocks (as represented by the S&P 500) were averaging gains of +28% with 5 straight winning years between ’94 and ’99 until they gave back nearly half of what they had made when the internet bubble burst.
These periods of sharply different performance in stocks and hedge funds show that all asset classes cycle back and forth between good times and bad. But it is hard to come up with a reason or event which would hurt managed futures. The last “bad time” for managed futures was in 2005 when global markets were at all time lows for volatility. And considering that most managed futures programs are long volatility models which benefit from prices breaking up or down from their current levels (thereby increasing volatility), the next bad period for managed futures will likely be due to sharply lower volatility levels. Raise your hand if you think we’re going to go back to the record low volatility of 2005 any time soon.
But even in the bad times for managed futures, there haven’t been losses anywhere close to the magnitude we’ve seen in stocks this year and in year’s past. Now, any individual program can have many times the volatility of the managed futures index and once again – past performance is not necessarily indicative of future results, but the point remains that there are not a lot of shock/crisis scenarios which we think would hurt managed futures in the same way stocks and hedge funds have been hurt in 2008.
We’ll add our own disclaimer here that 1. we are not able to peer into the future, 2. we just said two paragraphs higher how it’s impossible to gauge the future off the past, and 3. we are in the managed futures business, so we’re likely biased. But we challenge you to think of a worldwide event (a Black Swan) which could hurt the managed futures asset class. Mine is a regulatory change which would increase margins 3 or 5 fold, thereby decreasing investors ability to leverage their managed futures investment by a similar amount.
Looking forward, there are sure to be bad periods for managed futures. They are unavoidable, just as they are unavoidable for all asset classes. That, more than anything, should be the lesson most people take out of the 2008 market turmoil. And for that reason, the question shouldn’t be whether managed futures will continue to outperform.
The question should be, what can I do to diversify my overall portfolio so it performs better during periods of market stress (periods like 2008). Whether we’re in the “golden age” for managed futures and they continue to outshine other asset classes for several more years or not, the answer to the question of how to better set up your portfolio to handle periods of market stress seems like it should include managed futures.
- Jeff Malec
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.
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Feature | Week in Review | Chart of the Week |
Overview
Global economic and geopolitical turmoil continued to cast a pall over markets during December, although there were signs in some sectors that just maybe they were ready to turn the corner. The climate remained unstable/volatile due to various headlines of institutional and industrial problems which in turn related to a string of bad economic releases, but some sectors seemed to find support from the FOMC announcement cutting the their target rate to 0%-.25%.
The news seemed to perk up the hard asset and most inflation sensitive sectors on ideas the FED would pump as much liquidity into the system as needed to turn the tide. The one inflationary or pro-growth sector to ignore this theory was the energy complex which continued to be dogged by ideas that consumption would be curtailed worldwide after the recent demand shock the market experienced. For the month Crude Oil lost -20.21%, Heating Oil was down -17.82%, RBOB Gasoline shed -14.78% and Natural Gas ended -14.53% lower.
Stock Index price action in December experienced the ebb and flow of a sector looking for direction. An early month rally gave way to the FED announcement of lowering their target rate, but a late month climb of the wall of worry seemed to give the sector confidence which enabled a moderate Santa Claus rally especially in the Small-Caps. For the month Russell futures added +5.57% and Mid Cap futures gained +4.67%. Most large caps followed suit in a more limited try as the tech heavy NASDAQ futures gained +1.96% and the S&P 500 futures were up +.78%. The Dow futures -.79% ended fractionally lower.
Activity in Currency futures provided plenty of volatility as various news items throughout the month spelled trouble for both the U.S. Dollar -5.92% and British Pound -5.47%, especially when both Fed and Bank of England made it clear they would use whatever tools necessary to get things turned around. Investors flocked to other currencies on this news and favorable interest rate yields. The Swiss Franc +11.59% led the gainers in this sector followed by the Euro up +8.89% and Japanese Yen which gained +4.74%. Flight to quality buying was taken to a whole new level in the Rate futures after the December FOMC rate target decision. 30-year Bonds gained +7.94% and 10-year notes ended up +3.96%.
Metals activity continued to be a mixed affair during December as the precious metals were a favored sector by nervous investors looking for hard assets. The FOMC announcement also helped to aid the rally with far thinking market participants getting inflationary ideas from the fact that the FED would have to deluge the market with liquidity after the latest rate cut. Silver gained +9.94%, with Gold adding +7.46% and Platinum ending up +6.32%. The Industrials were still dogged by the stigma of poor economic forecasts in 2009 as Copper lost -14.62% and Palladium fell -2.96%.
The Food and Ag sectors did show some signs of life in December, especially the base commodities which found support from ideas they would be the main targets for appreciation in tough economic times as people would use the majority of deposable income for food. For the month Corn gained +10.42%, Soybeans were up 9.19%, Wheat added 8.14% and Cotton finished 2.37%. Cocoa +13.93% continue to rally due to weather issues in the top growing regions. Ag sector losses were led by OJ -13.94%, Lean Hogs -9.28%, Coffee -7.47% and Live Cattle -1.93%.
Managed Futures
Multi – Market systematic managers wrapped up a very successful year in 2008 with only a so, so month in December. While most managers remained profitable, others struggled as choppy market conditions ruled throughout the month. Some of the choppiness could be general lack of malaise in the marketplace that saw traders shut down early for the month rather than trying to navigate tough holiday trading conditions. The other major factor was the Fed’s unprecedented decision to lower interest rates to 0%. This rate cut, which is intended to spur the US economy, has led to what many analysts are calling “bubble” market conditions in the US treasury futures marketplace. US 30 year bond futures and US 10 year note futures both soared to record highs in December and became very volatile in the last week of trading, often moving two to three basis points in one trading session. The volatility spilled over into the FX markets which saw large spikes upward in markets like Eurocurrency, Swiss Franc, Japanese Yen and Aussie Dollar.
December’s top performing multi-market manager was the Attain Portfolio Advisors Modified Program with returns of +3.47% for the month and +72.54% (est) for 2008. The December gains came from the intermediate swing trading models which did well trading grain, energy, and meat markets. The choppy, mean reversal type trading conditions seen in December are typically the perfect trading environment for swing trading programs and these strategies carried the APA Modified Program this past month. Next in line and just behind APA was Hoffman Asset Management with estimated returns of +3.03%. Hoffman had a very good year that had estimated returns of nearly 25% with a very manageable max dd of approximately 8%.
Other profitable programs in December include Clarke Capital Global Basic at approximately +1.51% and Clarke Capital Global Magnum with estimated returns of +1.43%. The Clarke programs were up approximately 80% (Global Basic) and 46% (Global Magnum) in 2008! Finally the Lone Wolf Investments Diversified Program bounced back with a strong month in December gaining an estimated +2.85%.
There were some programs in the red for the month. Included in that group was the Attain Portfolio Advisors Strategic Diversification Program which was down an estimated -2.55% for the month after seeing several day trading strategies struggle last month.
Other programs in the red include Dighton USA at -15.67% in December which in spite of the rough month is still up +24.05% (est) in 2008. DMH futures management was down -1.59%, and +10% for the year. Claughton Capital lost an estimated -5.56% but finished ’08 up almost 10% as well. Finally Robinson – Langley was down a fraction at -0.13% in December but finished the year up an estimated +29% higher.Single market stock index managers Pere Trading Group LLC and Paskewitz Asset Management also had a profitable month with Pere returning an estimated +15.50% while Paskewitz was up an estimated +1.80%. In 2008 Pere had estimated returns of +121% and the Paskewitz Contrarian 3X Stock Index program was up an estimated +28.47%.
For most option trading managers, December's month end was a graceful end to a brutal year. Interestingly enough, the month's top performer happened to be one of the year's "biggest losers" - Ace Investment Strategist finished December up approximately +12.34%, but ended the year down approximately -61% (all of which occurred in Sep - Nov). Other December option results were as follows: Cervino Diversified Options +1.05%, Cervino Diversified 2x +1.25%, Crescent Bay PSI +0.59%, Crescent Bay BVP +1.5%, FCI -9%, Raithel +0.48%, and Zenith Index remained flat.
Was the positive performance out of the Index Option traders a sign of good things to come? 2009 is sure to be an interesting year as investors slowly increase their appetite for risk by re-engaging some of the above mangers. For those of you who are a bit more aggressive, with market volatility coming down from its all time highs now could be an interesting time to consider getting started or adding to you account. For additional reference on the "sweet spot" for option sellers click here to read our Oct. 2008 article.
Agriculture mangers finished 2008 with mixed returns in December but ended a wild year net positive for those we track. December's top performer was NDX Shadrach which returned an estimated +5.94% and ended 2008 up approximately 47.19%. Other Agriculture estimates for December were as follows: NDX Abednego +1.47% and Rosetta -3%.
Systems
For the second week in a row, there were several market closures in observance of the New Year’s holiday on Thursday. Most of the U.S. futures exchanges had regular hours on Wednesday and Friday, but trading activity slowed to a snail’s pace as many traders packed up shop for the year the week prior. Trading systems were extremely quiet and those that did trade wish they had packed up shop the week prior as well.
Of the day trading systems that were active last week, most traded on Monday and Tuesday before liquidity dried up on Wednesday and Friday. The European systems trading the Dax and Eurostoxx on Eurex generally outperformed the U.S. systems. Top honors last week went to Play Dax +$ 4,802 and Rayo Plus Dax +$3,676. ATB Welcome v1 Dax and ATB Welcome v4 Dax were +$838 and +$813.50 respectively. Two profitable domestic systems were EVP 1 US and Compass SP which were +$1,330 and +$650 respectively. Rounding out the other profitable day trading systems was Buho ESX +$650 and BetaCon 4/1 ESX +$360. On the losing side, R-Mesa 5 ERL lost -$290 while Waugh eRL lost -$343.60.
Moving on to the swing trading systems, Jaws US 60 was the top performer up +$1,934 after closing out a short trade on Friday. AG Mechwarrior ES closed out its second consecutive winning trade for +$765. On the losing side, Ultramini ES lost -$380 while the Strategic systems dropped -$1,817 in the ES and -$8,925 in the SP. Strategic US went long last week and held the position heading into the weekend for a large open trade loss.
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.