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Q1 Managed Futures Review
April 6, 2009
After simply trouncing stocks, bonds, and hedge funds in 2008 (past performance is not necessarily indicative of future results) – managed futures have come back to Earth a little bit thus far in 2009, with the main managed futures indices down between 2.50% and 4.00% for the year.
Key: YTD performance numbers are estimates as of 2/27/09 (1/31/09 for Hedge Funds) 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 (ex USA), US Stocks = S&P 500 Index
This is hardly anything to worry about after managed futures put in such a remarkable 2008, but many investors want to know why managed futures had a poor first quarter. Why have managed futures not picked up where they left off in 2008? And more importantly for many investors diversified between many different types of managed futures programs, why have so many different types of programs seen losses in the first quarter of the year.
We have gone straight to the source to answer these questions, asking many of the managers of the recommended programs on the Attain Capital website why their programs are in a drawdown currently and what their outlook is for the rest of the year. The commentary from APA, Clarke Capital, DMH, Hoffman Asset, Mesirow, and Paskewitz are below.
But before we get to the advisor’s commentary, we’ll share a bit of our own. The most obvious thing going on is an end to the months long down trend in stocks, commodities, and foreign currencies (and subsequent up trend in the US Dollar, Gold, and Bonds) has stalled and even ended in many cases.
As can be seen in the chart in our chart of the week section (courtesy of Bloomberg.com), the past three months have seen the major commodity indices chop around in a directionless, sideways pattern. This pattern isn’t ideal for systematic managers such as Clarke, Hoffman, and APA as they are at risk of going long the false breakouts at the top and short at the bottom. They need follow through and a breakout from the range.
But what about the discretionary traders such as Mesirow and DMH which could adapt and trade this new range, selling highs and buying bottoms? This is a possibility for them, of course, but the range bound conditions coming immediately after such historic volatility have them in a mostly defensive mode, weary of getting in front of the next large move in one direction or another.
Finally, shorter term specialty managers such as Paskewitz, Pere, and APA (to a degree) which rely on such sideways, range bound markets for their day and swing trading are not seeing such in the stock index markets they operate on. The stock indices have decoupled from commodities somewhat, seeing a sharp move down at the end of February/start of March followed by an even more dramatic move higher throughout the rest of March. This one-sided movement, opposite the predominant trend (down) has hurt those models which look to profit from markets not going too far in anyone direction over a short period of time.
So, March saw the worst of two worlds across the broad spectrum of different managed futures strategy types, with both range bound conditions (in commodities) and sharp directional movements opposite the predominant trend (stocks) causing for both diversified and market specific, both systematic and discretionary, and both long and short volatility managers seeing losses.
Drawdowns are always hard, because there is so much uncertainty about the future. Will the program you are invested in keep struggling for one month, two months, a year? Will it start its move back to new equity highs tomorrow? Is this going to be a new Max Drawdown? Nobody knows for sure, which makes sticking through a program in drawdown so hard.
What we find helps in these times of uncertainty is to battle it with what you do know and can control. Go back and see how many times the program you are invested in has been in similar drawdown territory. Along the lines of misery loves company, seeing that a program has “been there, done that” before can be comforting. Set a hard “line in the sand” for how much you want to risk with a specific program, and exit it when and if it hits that point. There is no sense risking an 80% loss or something on a program which has only had a -5% Max DD in the past. It makes more sense to cut it off at -10% or -15% loss. And finally, we can battle the uncertainty of drawdowns with the certainty that market environments are ever changing, and that if we are in (or have just come through) a bad period for this or that managed futures program, it is likely that the inevitable changes in the market are just as likely to swing things back to a more beneficial market environment. Often times ideal trading environments emerge from these less than ideal periods.
As for what the market is likely to do from here, we believe the world is still “on edge” as it tries to emerge from the financial crisis, and we believe there will be significant moves in currencies and bonds (to name two markets) as the world wrestles with the yet unknown consequences of the massive worldwide stimulus packages being implemented (possible unintended consequences could be the Chinese dumping their US dollar holdings?, massive, rampant inflation?, or one of the G20 nations defaulting on its debt?).
Overall, we believe there will be plenty of opportunities in the months and years ahead to profit from the resulting volatility, but know there will also be down quarters and even years along the way. Those who are able to put those losses in perspective and stick with their managed futures allocation as overall portfolio diversifiers are likely to do well in our opinion over the long haul. While those who are quick to jettison managed futures programs which have a losing quarter or year, and rush headlong back into stocks and bonds when they rally at the expense of their managed futures exposure are likely to again suffer the losses a non diversified portfolio did in 2008 when the next market crisis hits.
But don't take our word for it. The following are comments on the first quarter/March drawdowns from six of the most popular programs on our recommended list.
The following comments are from the managers of each program listed. They are the opinions of that person, and do not necessarily represent the views of Attain Capital Management. Comments are listed alphabetically by program name.
Attain Portfolio Advisors:
“Three recent market conditions can be pointed to as possible causes for the recent DDs in the APA programs.
One, a rebound in commodity and stock market prices, and subsequent sell off in bond and the US Dollar, which has resulted in giving back a portion of the July/Aug through Nov profits from our long term trend following components.
The APA program is designed to handle these periods through performance in the other two time frames (day trade and swing trade), and our models will dynamically adapt to this new consolidation period, looking to trade within the range if it stays in a consolidation period, while also placing low risk trades from time to time on various markets which appear to break up out of the range, or down to new lows.
Two, Commodities and Stocks have seen increased correlation during the “financial crisis”. As the financial crisis has worn on, it has become common for commodities and stocks to trade in the same direction most days. It has become one big “global economy trade” of sorts, where equity prices going up is taken to mean the global economy is back on track and global demand is back, sending energies, grains, softs, industrial metals, and the like higher; and vice versa when equity prices move lower.
With part of the APA strategy diversification between markets, all of the markets moving in the same direction at the same time can cause issues. In normal times, APA may be short stock indices and long Crude Oil on a particular day, and could expect to make money on both trades that day. Over the past 4 months, the likelihood of making money in opposite positions in any two markets on any given day has been greatly reduced.
Of course, this pattern of high correlation can be beneficial as well, and a good portion of APA’s 2008 gains were due to being short this “global economy trade”. The good news is that this pattern of high correlation is starting to unwind, and these markets are starting to decouple from one another.
Three, the apparent/implied risk of many markets has been higher than the actual risk over the past few months; due to the drastic move lower form the all time highs across nearly all commodities in July of 2008.
This mismatch has caused the risk on some APA trades to be pushed way out (in case the volatility continued), while the actual moves were just a fraction of what they were from July to November. For example, one short energy trade signaled by an APA model was looking to risk over $35,000 for a single contract (or 3.5% of a $1 Million account). APA looks to only risk 0.25% to 1.0% per trade, meaning this trade was too risky to be taken and as such was passed on. It went on to make approximately $50,000 (5% gain on $1 Million), so in spite of the model seeing success, no accounts saw those gains.
The good news is that our (APA) models dynamically adjust to the volatility as time goes by and the July-November period becomes more distant. The risk on trades such as the energy one outlined above have come way down, and the adjustment is already underway if not complete elsewhere – with the risks more reflective of the environment they are working on than the past environment. “
“ It's been a trying Q1 here at Clarke to be sure. We directly attribute the cause of the drawdown to the Fed's surprise announcement on March 17th, specifically that they would be buying 300Bln long-term Treasurys as a part of their plan to "use all the tools necessary to achieve economic stability and recovery."
This action resulted in an unprecedented rise of 8 full points in the 30yr long bond, 5 full points in the 10yr note, etc. At this time, we had (already in the market) resting interest rate buy orders above the (pre-fed announcement) market which subsequently had to be filled at extremely inflated prices. Usually, our slippage in these contracts is no more than a few 32nds, but this time, it amounted to several full points. Not to mention we were also entering these trades at the complete "top" of the market. As we all know now, that rally did not continue and those positions were exited at severe losses.
At the same time, we had built up (over the previous few months) substantial short positions in both foreign currencies and US dollar-denominated "softs" (coffee, cotton, cocoa, etc) as well as some shorts in domestic energy contracts and grains.
The Fed announcement also included the fact that they were prepared to spend an additional 750Bln to buy troubled mortgage paper to try and stem the tide in that arena. The resulting total 1.25 trillion spending announcement had a devastating effect on the US dollar and as such killed all of our short commodity positions at the same time our interest rate trades were going south. It was, in a perverse way for us, the "perfect storm."
By virtue of their smaller account sizes, the GB[Global Basic] and GM[Global Magnum] programs trading models are much more stringent about entry and exit signals, and as such were much better suited to ride out this event. Having only one position on at this time turned out to be a blessing in disguise. While there are certainly no guarantees, we would be hard-pressed to imagine the smaller programs sustaining similar loss percentages as the larger ones.
We do not anticipate future "game-changing" events such as the aforementioned Fed announcement anytime in the near future, but these are uncertain times. However, we are taking steps to modestly scale back the number of program models, and we are also in the midst of a "model evaluation" designed to tweak individual model efficiency, with the goal of both steps to be having the models trade less, but with greater profit performance. “
There have been a lot of what I call "false starts" in the markets so far this year. You think a market is turning and then the field judge calls all the runners back. The trick for surviving these periods is to minimize losses until things improve. Careful trade selection and avoiding sideways markets helps too. Being a discretionary program has that advantage over a systematic program. This is exactly what we are trying to do and that is why our recent drawdown has been kept to a minimum.
We feel there are going to be many opportunities going forward. We do not have any intentions of changing our methodology. Markets sometimes get like this. We feel it's an excellent time to start a managed futures account or add to an existing program at DMH.
-David M Heinz
Hoffman Asset Mgmt:
“As a trend follower my methods are dependent upon trending activity in markets and sectors. Unfortunately there has been a marked absence of sustained trends recently and instead a lot of directionless choppy trading. The shift between trending and non-trending periods tends to be cyclical and recent drawdowns in trend following programs likely represent good entry points for savvy investors.”
"As a directional program our strategy thrives in an environment where markets are trending around a central theme. Over the final 6 months of 2008 capital liquidation in equity and commodity markets was the driving force that led to many identifiable trends. As the liquidation nears its final phase significant capital flow has dried up. This has created a choppy environment as the futures markets wait for the next story and round of capital.
Difficult periods are what separate the good managers from the bad. Environments such as this help to highlight our ability to control risk when the markets are not accommodating our strategy. Capital protection is one of our primary goals. It has allowed us to keep drawdowns at a minimum during the unavoidable times of difficulty. We will continue to rely on this part of our program until the markets signal that they are moving out of their current lull."
- Tom Willis
“We lost modestly in March because early in the month the market was a straight line down, and then later in the month it was a straight line up. The worst case scenario for our strategy is extreme persistent one-way price action day after day.
We feel that the rest of the year is likely to trade within the range set earlier this year. It is likely to remain volatile, and largely directionless, and those are conditions that are favorable to our strategy.”
What/Who did do well in the first quarter?
It wasn’t all bad news in the first quarter for CTAs, and there were several which did well, thanks in part to their approaching the market differently. We’ve listed three such managers below, two of whom are option traders which were about as popular as the plague about 4 months ago. As often happens in investing, that was about the perfect time to get involved with them.
We’ve been trying to tell anyone who will listen that Cervino2x is a good addition to a diversified portfolio of managed futures programs, but more often than not people pass because there isn’t enough history, or not enough return, or they see something sexier on the lot.
While we won’t label anything which sells options at times as conservative, we do think this program is a nice stabilizing force for any portfolio. Their ability (like any option trader) to make money in sideways markets makes them a great diversifier for those portfolios skewed towards long volatility mangers who need markets to be moving (APA, Clarke, Hoffman, etc.). The trade off is that they could really suffer when volatility spikes, but the fact that they made it through a very tough 2008 which essentially wiped out most other option traders makes us believe they will be around for a while.
Emil Van Essen Spread Trading - http://www.attaincapital.com/managed_futures_rankings/detail/1020
The Emil Van Essen Spread Trading Program has been a regular on the Top 5 CTAs past 12 months table in our newsletters the past few months, and is in the queue to be added to the Attain recommended list sooner rather than later. They had a great Q1 behind their spread trading across many different markets, as compared with spread traders Rosetta (ags only) and NDX (meats only) who operate on specific market groups.
Look for more on the Van Essen program in the months ahead as we complete our due diligence process and learn more about what makes their strategy tick.
FCI (Financial Commodity Investments) –
The beleaguered Financial Commodity Investments (FCI) continued its comeback from a drawdown in 2008. There is not much investor interest in trading option selling programs anymore after many took steep losses as volatility exploded in 2008, but for those brave contrarians out there who bet on volatility subsiding, FCI has paid off.
Both their ‘old’ program and their newer more active program did quite well in Q1. This should be no surprise as they like the sideways market activity which was seen in commodities, and since they don’t have stock index exposure (which was the one market which was moving).
FCI will have its problems in the future when commodity volatility spikes, but if we’re in store for a prolonged L shaped bottom in commodities; this program could continue to do well while others suffer from range bound conditions.
Discretionary and systematic do not typically go hand in hand; however for Lone Wolf this approach has worked to their advantage as they use discretion on which systematic models to apply to which markets. Since experiencing a difficult period October/November when other multi market managers were flourishing (their trading/ models struggled to adapt to the sudden change in the market trend/ volatility spike), they have found their rhythm so far this year, ahead +15% or so since January low.
Lone Wolf’s trading is very short term (1-2 day hold times) and has historically found most of its returns in more obscure markets like Gold, grains, and softs. Their program trades 5 core systems where they have defined risk per trade allowances and also employ a rotational model for including or excluding markets. According to the manger, “their edge is in their market experience as they focus on portfolio performance /anti risk first”.
IMPORTANT RISK DISCLOSURE
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Feature | Week In Review: Month in Review - Stocks lead energies, grains, and foreign currencies higher | Chart of the Week
March came in like whimpering lamb and went out like a lion as steps by the U.S. government and countries abroad helped send stocks to not just their best monthly performance in seven years, but also the first positive monthly close for 2009. The upside momentum started with the passing of the U.S. economic stimulus plan and was furthered by the results from the FOMC meeting in the U.S. at which the Fed governors indicated it would pump more liquidity into the system by initiating more treasury purchases to stabilize the ailing bond sector. The final fuel for the optimism was a slew of better than expected economic releases that painted a picture of a better (or less weak) U.S. economy in February. For the month the tech heavy NASDAQ futures +10.89% posted the strongest rally followed by S&P 500 futures +8.73% and Dow futures +7.87%. The small cap sector showed just as much enthusiasm led by the Mid-Cap 400 futures +9.27% and followed by the Russell 2000 futures +9.17%.
Activity in Currency futures again provided plenty of volatility as the FOMC news brought a turn in trends from recent months. The idea of further U.S. Dollar liquidity helped set the tone for heavy selling in the Dollar index -3.31%. The Japanese Yen -1.61% followed with its own selloff after government reports indicated a less than favorable economic outlook. The continentals found the news to their liking with the Euro Currency rallying +4.68% followed by the Swiss Franc +2.67% and the British Pound +0.38% despite rate cuts by the European Union and a bad rate auction in the U.K. The interest rate sector ended March on a firm note as it took the action by the FOMC as an indication that the U.S. government would try and hold down lending rates for the near future to bring the credit market into a healthier state. 30-year Bonds +4.96% and 10-year notes finished +3.34%.
Most metals enjoyed a strong month in March as the passage of the U.S. stimulus package and budget seemed to be good medicine for this sector. The industrial metals benefitted the most as indications that a heavy portion of the stimulus would be used on infrastructure and building sparked heavy buying. Copper +19.89% led the way followed by Palladium +11.80%, Platinum +3.63% and Silver +1.00%. Gold -3.56% lost some luster from money moving back into other sectors relieving it from safe haven status for the time being.
Energy sector price action took a turn for the better during March as moves by the U.S. Federal Reserve and U.S. Government helped cement ideas that better demand could be coming sooner than expected. These ideas help spark a nice rally with Heating Oil +7.09%, Crude Oil +5.91% and RBOB Gasoline +3.56%. Natural Gas futures -11.83% remained under pressure from a massive build in supply.
The Food and Ag sectors also got into the action regarding the moves by the U.S. Government with talk that more liquidity could spark better demand not only in the U.S. but abroad. The Grain sector also found support from the USDA quarterly planting intentions report that showed expected lower total planted acres for the upcoming growing season. For the month Corn rallied +12.50%, Soybeans +8.57%, Cocoa +8.41%, Cotton +5.90%, Coffee +3.06% and Wheat +2.25%. March losses included Sugar -7.82% on ideas lower ethanol demand could lead to heavier supplies and Live Cattle -2.78%.
Multi-Market trend following style managers just finished one of the most frustrating and challenging quarters in recent history. After a year of seemingly nothing but profits, reality set in for many in Q1 with most managers posting negative returns to start 2009. Increased correlation across sectors remains the biggest issue for many managers as stocks, commodities, bonds and currencies all seem to be moving in synch in one big global trade. Eventually the markets will decouple as the world economy begins to stabilize and global trade begins to pick up again. This will be a welcome change for most managers who thrive on a variety of market trends. Here’s hoping it is sooner than later.
The top performing multi-market manager at Attain in March was the Lone Wolf Investments, LLC Diversified Program which was up approximately +3.00% for the month. This discretionary program managed by Mr. David Mosseau did very well trading across both the precious metals and treasury sectors in March. Lone Wolf Diversified was also one of the few managers that had a profitable first quarter as well with estimated returns of +7.50%. Congrats to Mr. Mosseau!
Elsewhere the reports for March aren’t as good. Some managers including Clarke Capital Global Magnum -0.57% est. and Clarke Global Basic -1.55% est., DMH -0.56% est., and Dighton USA -0.63% were able to keep losses to a minimum. Others like Mesirow Absolute Return -1.58% est. and Hoffman Asset Management -1.91% est. suffered only moderate losses in March. Others took bigger hits and have more ground to make up. Managers in this category include APA Strategic Diversification Program at approximately -4.20%, the APA Modified Program at approximately -7.43% and Robinson – Langley at -5.42% est.
Finally, single market stock index traders also struggled in March. Short term trader MSLO was down slightly at -0.24% est. , the Paskewitz Asset Management Contrarian 3X Stock Index was down approximately -0.80% and Pere Trading Group, LLC lost an estimated -1.77% for the month.
Don’t look now, but option selling is trying to make a comeback after a tough 2008. The top performing strategy across not just option traders, but all strategy types was the Diversified Commodity Option Traders. Leading the pack was Financial Commodity Investments OSS program which was ahead an estimated +6% for March and +18.75% for Q1. FCI CPP was a close second as it was up an estimated +4.73% in March and +19.31% for Q1. Cervino Diversified Options 2x was down -1.09% in March yet remained ahead +4.5% for Q1. Finally, Cervino Diversified Options 1x was down -0.54% in March yet ahead +2.37% for Q1.
Other option trading estimates for March were as follows: Ace Investment Strategists -11.2%, Crescent Bay PSI -7.66%, Crescent Bay BVP -11.53%, Raithel Investments +0.30%, and Zenith Index +0.31%.
Agriculture and Grain trading managers continue to show lackluster returns in the current market environment. As with many of the trend traders discussed above most Agriculture and Grain traders look for consistently trending market environments to capitalize on – whether these trends occur as a result of seasonal, fundamental, or technical moves in the market is where each manager finds their edge. The estimates for March are as follows: NDX Abednego +0.29%, NDX Shadrach +0.17%, and Rosetta was down an estimated -2.5%.
Trading systems perked up in the month of March, with day trading systems and a select group of swing programs recovering from a mediocre start to the year.
Beginning with the day trading programs, Compass SP finished the quarter on a high note +$4,378 for the month of March. BounceMOC eMD and BounceMOC eRL were neck and neck with results of +$2,763 and +$2,731 for the month on just three trades each. Waugh eRL was significantly more active than the Bounce programs, averaging four trades a week finishing up + $1,817 for the month. BetaCon 4/1 ESX was slow and steady up + 750€ for the month with Rayo Plus Dax not too far behind up +312€. On the losing side, ATB TrendyBalance v2 Dax lost -1,117€ on eight trades for the month.
Elsewhere, swing systems Bounce eMD and Bounce eRL outperformed their day trading counterparts +$3,496 and +$3,094 on three trade each. Ultramini ES lost -$192.50 on six trades for the month. Strategic ES lost -$655 for the month while Jaws US dropped -$742 on a pair of trades. Finally, AG Mechwarrior ES lost - $1,750 averaging three trades per week for the month.
In long-term trading, treasury prices shot up mid-month to trigger buy signals for trend-following programs only to drift lower in the second half of the month. Additionally, most programs that were bearish in grain and soft markets exited their positions in March and will look for new trends to develop.
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.