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What's ailing managed futures in 2009?
August 3, 2009
In looking through the early July estimates of many popular managed futures programs, it appears July is shaping up to be the 6th losing month out of the first 7 months of the year for managed futures. (source Credit Suisse/Tremont Managed Futures Index).
We have touched on the poor trading environment in this space a few times already this year, but the questions remain: What is going on? Why have managed futures been on a losing streak? What is in store for the rest of the year? How can my CTA be selling into this ‘obvious’ rally? And so on….
We’ll start to answer the questions with our own commentary that there aren’t trends as most managed futures managers would define them going on. Most investors look at the move from the March lows to the current levels as a clear uptrend. But to a technical trader, 75% or so of that move was merely an end to the previous down trend (not a new uptrend).
The rate of change is a popular indicator which can signal the direction of a market’s overall trend. If we look at the 100 day rate of change to confirm a new trend, consider that Crude Oil, which has rallied from just under $42 on a back-adjusted basis to over $71 today (nearly 70%), didn’t have a positive rate of change until May 14th (after it had already rallied 42%). If you prefer moving average cross overs as trend confirmations, consider that Crude Oil’s 100 day moving average did not cross over its 200 day moving average until today, August 3rd (meaning that for some, the up trend is just now starting, after a 70% rally from the lows).
The same holds true for the S&P 500, which didn’t see a positive rate of change until a month after the low (4/16) and a 27% rally. Like the Oil, the S&P didn’t see the 100 day MA cross over the 200 day until just last week (7/28) after a 45% rally.
So while there have been significant moves, there have not been trends for most managers to take advantage of. Most managed futures advisors are not in the business of trying to pick tops and bottoms, as that is a practice fraught with risk (have you heard the old saying about trying to catch a falling knife?). The problem with trying to pick bottoms is that it is hard to know if you’re at the bottom, and therefore hard to know how much to risk. Conversely, getting in line with an established trend has a defined risk (you can risk to the point where prices are no longer trending, such as when prices fall back below/above the 100 day moving average).
So while not all managers are classified as trend followers, most managers do want/need some sort of trends to perform well. If there are no trends, than a manager is relegated to trying to pick tops and bottoms and the increased/undefined risk which comes with that practice.
The chart below shows the average number of trending days (as a percent of the total) across 6 main markets representing the various sectors enlisted by managed futures advisors. We defined trending days as the number of days the ADX (Average Directional Index) was upwards sloping on a 100 day lookback basis.
You can see that 2009 has less than half the number of trending days 2008 had, and is well below the average number of trending days across the last several years. It is likely not a coincidence that the last time we saw low readings such as this were in 2004 and 2005, when managed futures posted smaller than normal returns.
There are some positives to take out of the above chart. One, the historical range over the past 8 years has been between 35% and 53%, so we do not expect the 22% reading for the first 7 months of 2009 to hold at that level for the rest of the year. We expect it to revert to the mean and settle in somewhere in the low 30s. To be pulled back up to the low end of that range, the number of trending days will have to significantly outpace the non-trending ones through the last 5 months of the year (which should be a good thing for managed futures as a whole).
Secondly, the average % Trending Days has shown a tendency to bounce nicely off its past lows, bringing with it some of the best managed futures performance over this time period. The Credit Suisse/Tremont Managed Futures Index was up 14% in 2003 following the 2002 low, and up over 30% in the three years following the 2005 low. Past Performance is not necessarily indicative of future results, of course, but in our opinion this is the time to be setting your portfolio up for such a bounce off these low readings.
If your recently under the weather managed futures portfolio were your child, you may seek out a second opinion to see what’s ailing him/her; and along those lines we put the question of ‘what is going on in 2009’ to some of the popular managed futures advisors on our recommended list. They had the following comments:
Clarke Capital Management:
I …believe that the continued volatility in the USD is affecting USD-denominated commodity prices in a detrimental way … (i.e. every time the USD jumps one way or the other, commodities valued in USD must adjust. This contributes to larger price fluctuations.)
…[W]hen this will all end and markets can resume some sort of normalcy [is anybody’s guess]. We are in a "ride out the storm" mentality here and know that once all this uncertainty subsides, we can get back to the numbers we are used to seeing from our models and programs.
Clarke Capital Management is currently in the process of fine-tuning the trading models used in all of our programs with an eye towards making them more trading-efficient. That is, reducing the number of trades while preserving upside profit potential. This evaluation will hopefully result in less volatile drawdowns than those we are currently experiencing. This process is approximately 75% completed, and should be finished by month’s end.
Good point about the US Dollar/Commodity link Jim. This has always been a part of commodity pricing, of course – but there seems to be more of a link currently than we’re used to seeing. The following correlation values over the past 10yrs, 5yrs, 1yr, 3mo, and 1 month bear that out, with commodities (as represented by the CRB futures) becoming more correlated the closer to the present time we get (technically they are becoming more inversely correlated, but the important part of correlation is the absolute value).
Part of what may be going on here is that with interest rates so low(essentially zero), that component of commodity pricing has in effect been removed, leaving the currency rate to affect the pricing more.
Dominion Capital Management:
…During the last 3 months we have seen a change in this environment to one of consistent, erratic, high volatility. Most markets have transitioned from an emotional environment to a political one (where short term direction starts and stops based on political talking heads and not price momentum/exhaustion). This creates a conflicted volatility time series—intra day and daily volatility are extremely high, but weekly and monthly are not. Normally, extreme daily and intra-day volatility indicates higher weekly and monthly volatility as it generally “predicts” price movement. This has not happened (yet). Although unpleasant, this difficult run is within our expectations statistically, and we look forward to what generally follows: statistical mean reversion in performance.
Recent “politicized” markets that have demonstrated this type of volatility disconnect include those following the contested presidential election 8 years ago and immediately following 9/11. Both environments were difficult but lasted only a month or two….The global macro outlook going forward is very interesting and should provide many opportunities throughout the rest of this year in the midst of a more “normal” volatility contraction/expansion environment…
Scott A. Foster
Dominion Capital Management, Inc.
Scott touches on a good point here in mentioning volatility time series, which is the fact the global volatility is contracting after spiking to somewhat historic levels in 2008. We ran a quick study on 55 global commodity markets (including stock indices, bonds, and currencies), and found that 73% of these markets are experiencing lower volatility now than they were 10 months ago; with the average market has seen a 15% decrease in volatility versus 10 months ago. This may seem like common sense in retrospect, given how bad it seemed last fall. But it also seemed pretty bad in early March of this year, and we sure haven’t seen markets calming down on a day to day basis (Soybeans were up over 5% today, for example). What appears to really be happening is that markets remain volatile in historical standards, but in spite of that are now significantly less volatile (on the whole) than they were last year. Most managed futures programs see their greatest success when volatility is expanding from low to high, as they can size positions and set their risk based on the low volatility and realize profits on the high volatility. The current environment has flipped that scenario on its head, with managers having to size positions based off the high volatility, while potential profits come about on volatility lower than at the trade’s entry.
The following table shows Attains past mid-year readings on the percent of markets we track seeing either increase or decreased volatility. It is no coincidence that the three worst years of performance of the Credit Suisse/Tremont Managed Futures Index happened in the three years which saw the lowest percentage of markets seeing increases in volatility.
Past Performance is Not Necessarily Indicative of Future Results
% of markets seeing Volatility increase
CTA Index Performance
%mkts run mid-year using Attain internal data
CTA index = Credit Suisse/Tremont Managed Futures Index
Hoffman Asset Management:
It's easy to get long-winded and academic about the current situation, but the simple truth is that after several years of stellar performance the current lull for…trend following program[s] is statistically nothing more than a plain-vanilla drawdown. No program goes straight up; it's always three steps forward and two steps back. This is completely normal and has traditionally represented a terrific buying opportunity for our program. In fact, I have personally increased my own trading stake in my program substantially in the last several weeks.
Hoffman Asset Management
Dean touches on an important point here, which is that managed futures programs cycle in and out of ideal trading environments. Good programs try to keep losses to a minimum when a poor trading environment pushes them into a DD period (when their models are wrong),with the goal of making more than they lose when the models swing back to being right. The trick isn’t correctly calling the next rally or sell off every single time. The trick is making more when you do call a market correctly than you lose when your models don’t make the correct call.
As proof of this concept of markets cycling in and out of desired trading periods, just take a look at the chart below. This chart tracks the 6 month ADX reading of Soybeans on a monthly chart going back to 1959 (50 years!). The ADX stands for the Average Directional Index, and it is a technical indicator which measures the so called trendiness of a market. When the indicator is sloping upwards, it indicates that market is in a trending mode (good for managed futures), and when the indicator is sloping downwards, that indicates the trend is ending and/or choppy, sideways market conditions.
You can see in the chart below that Soybeans, for one, have tended to cycle in and out of trendiness with some regularity over the past 50 years (past performance is not necessarily indicative of future results). Over this time, there have been 41 distinct periods of non trendiness (more than 2 consecutive months with lower ADX readings than the previous month), meaning the market is not trending roughly 45% of the time. You can see on the far right side of the chart that we are currently in such a period. If we use Soybean trendiness as a proxy for the trendiness of other commodities momentarily, this helps explain in part why some managed futures programs are struggling (they are in one of the market down-cycles). This current non-trendiness period in Soybeans has been 5 months long, which just happens to be about the time the Managed Futures indices have seen losses. The good news is that the average non trending period (downward sloping ADX) has been only 6 months, so good times may be just around the corner as Mr. Hoffman alludes to.
Past Performance is Not Necessarily Indicative of Future Results
In the end – we are mired in a poor managed futures environment, as evidenced by the various managed futures indices showing losses through the first seven months of the year and several historically successful programs on Attains recommended list at new maximum drawdown levels. There is no denying the poor environment. But time has shown that these periods eventually do end, and trendiness returns to markets singularly and in aggregate (past performance is not necessarily indicative of future results). In a perfect world, investors would patiently wait for these periods in order to start their managed futures investment and in doing so greatly increase their chances for long term success. But unfortunately most people are taking this poor environment as a reason not to invest in managed futures, or as a reason to exit an underperforming program.
In our opinion, this is a recipe for losses. It usually entails locking in losses as the investor gets out of a program near its bottom, and then entering into the next investment at or near its highs. The next investment will then likely turn over, reverting to its mean and taking a breather, just as the old one starts to perform. If you have lamented on your poor luck, saying something to the effect of “right when I get in it goes down”, you are stuck in this never ending cycle of chasing returns by getting in at the tops and out at the bottom. This poor 2009 environment thus far for managed futures is a great opportunity to break out of that defeatist cycle. This is the opportunity to cash in on the huge stock rally and put money to work with solid managed futures programs offered at a discount because they are in a drawdown. This is your chance to be someone who sells the high and buys the low, and get rid of that pesky buy the high, sell the low persona.
IMPORTANT RISK DISCLOSURE
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The marketplace seemed to find a comfort zone during July with upside support stemming from a long line of favorable economic data coupled with better than expected quarterly earnings from the corporate sector for the second quarter. This data provided the catalyst for ideas that the global economy may be near equilibrium or even a tad on the improvement which led to a firming tone in the index sector and some commodity price appreciation. Asian economic reports were again construed as improving in July as several releases pointed to renewed manufacturing and building especially in China. Several commodity sectors continued to be fixated on the potential for inflation as ideas that the stimulus injection not only by the U.S. government, but abroad during the past several months will lead to large moves in several protein and food commodities. Stock index futures price activity for July continued to build on the momentum started back in March with the close topping off the best 5-month appreciation since the late 1930’s. For the month the Russell 2000 futures led the way up +9.60% followed by Dow Jones futures +8.72%, S&P Midcap 400 futures +8.67%, Nasdaq 100 futures +8.52% and S&P 500 futures +7.53%.
The Food and Ag sectors took their cue from the pro growth inflation ideas, especially the soft’s that posted strong rallies across the board. Added fuel came from news of stronger demand for Cocoa and OJ with releases showing African refined Cocoa exports running 7% greater than year ago levels and OJ surplus stocks being drawn down at quite a pace. China continues to forge ahead with strong purchases of most food products, although Corn and Wheat continue to find overhead pressure from prospective large U.S. crops. Activity in the grains for July saw Corn -4.85%, Wheat -1.77% and Soybeans -0.91%. The livestock sector Lean Hogs -7.63% and Live Cattle -0.65% continued to be hampered by weak demand and heavier supplies of pork. Soft commodities finished July led by OJ +19.33%, Cocoa +15.79%, Coffee +6.63%, Cotton +4.42% and Sugar +4.26%.
The Metals sector continued to trend higher sparked by strong Chinese economic news that helped advance High Grade Copper +15.47% followed by Palladium +5.44 %, Gold +2.75%, Silver +2.50% and finally Platinum + 2.44%.
Energy prices were fairly active during July as the marketplace fought between ideas of rising demand on better economic forecasts and large current surpluses around the globe. For the month RBOB Gasoline +6.12% was the only component to post a rally. Price activity in the balance of the complex had Natural Gas -8.26%, Crude Oil -1.89% and Heating Oil -0.27%.
Elsewhere, moving on to currency markets, the U.S. Dollar Index declined by -2.45% for the month. Driving the Dollar lower, the Japanese Yen saw the biggest increase against the greenback +1.71% for the month, followed by the Swiss Franc +1.62%, Euro Currency + 1.57% and British Pound +1.54%.
Bond markets, although increasingly volatile had a very quiet month on month net change despite the rising equity markets. Thirty-Year Bonds finished the month up +0.75% and the Ten-Year Notes ended up +0.87%.
In a month when most managed futures strategies struggled (Newedge CTA Index -0.74% in July / -5.22% YTD) there were a few bright spots. The most notable performers were the diversified options traders led by Financial Commodity Investments (FCI). FCI has been fighting hard in 2009 to come back from their 2008 drawdown in their OSS program and has been getting closer with each month that goes by. For July their OSS program returned an estimated +2.93% which puts them ahead over 20% YTD. Meanwhile, their CPP program was ahead 2.09% in July bringing the YTD up to + 25 % and reaching new equity highs.
Another bright spot in commodity option trading came from Zephyr Investment Group which was ahead an estimated 2.13% in July. Zephyr is not the Zephyr Asset Management once reported on in this section – Zephyr Investment Group Inc. Defined Risk program is new to Attain and is a Chicago based long-only option trader with a 3 year live track record of managing client accounts. The minimum investment for Zephyr is a mere $35,000 – for more information on Zephyr please email email@example.com.
Other option trading estimates for July are as follows: ACE Investment Strategists -2.08%, Cervino Diversified Options -0.04%, Cervino Diversified 2x -0.09%, Crescent Bay PSI -2.12%, Crescent Bay BVP -4.0%, Raithel Investments +0.31%.
Specialty managers were also able to achieve a positive month of trading on the whole led by Emil Van Essen which returned an estimated 1.61%. Agriculture managers Rosetta and NDX had mixed returns with Rosetta pushing ahead an estimated 1.37%, NDX Abednego +0.09%, and NDX Shadrach dropping approximately -0.37%.
Multi-market managers continued to struggle in July as market trends continue to be highly correlated across all sectors. The good news is that after 6 months of struggling it appears that there is nowhere to go but up from here. Here’s to hoping that the inevitable turnaround for the managed futures industry comes sooner than later.
Managers that performed well in July include Robinson-Langley Capital Management +3.83% and Integrated Managed Futures Global Concentrated +1.57% est. Both managers have seen a moderate level of success in 2009 and continue to outperform many of their trend following peers who have seen double digit losses in the red for the year. Congrats to both Robinson-Langley and Integrated Managed Futures!
Mesirow Financial Commodities ended the month near breakeven as they were up slightly in the Absolute Return Program +0.04% est. and the Low Volatility Program at +0.03% est. in July. Dighton Capital USA Aggressive Futures Trading did not trade in July.
Those with moderate losses in July include Clarke Global Magnum -0.52% est., Dominion Capital Management -0.57% est., Clark Global Basic -1.12% est., Hoffman Asset Management -1.65% est., and DMH -1.77% est.
Larger losses were incurred by Lone Wolf LLC Diversified -2.58% est., Futures Truth MS4 -3.55% est., Attain Portfolio Advisors Strategic Diversification -3.56% est., Futures Truth SAM 101 -6.65% est., and APA Modified Program at -12.40% est.
Short- term stock index traders were also down in July with MSLO -1.95% est., Paskewitz -4.52% est. and Pere Trading Group -9.79% est. all finishing in the red.
Trading systems continued their lackluster performance in July with mixed performance across all time frames. Despite continued upward pressure on global equity markets, intraday ranges have shrunk significantly leaving a lot to be desired from trading systems that base their calculations on previous patterns and ranges. Overall, day trading systems outperformed swing trading systems.
Beginning with the day trading systems, ATB TrendyBalance v2 Dax and Schooner2 EC were neck and neck +1,332.5€ and+$1,347 respectively for the month of July. Not far behind were Compass SP and Rayo Plus +$994.72 and 947.5€ respectively. Beyond those three programs, there were still some programs that were able to stay afloat. Those systems included PSI! ERL +$370, Upper Hand ES +$267.50, Freedom +$182.50 and BetaCon 4/1 ESX +130€. Moving into negative territory, Clipper ERL lost -$500, Viper II ES -$980.382, Waugh eRL -$1,832.21 and ATB Welcome v2 Dax -3,407.5€.
Moving on to swing trading systems, Jaws US 400 hit it out of the park +$3,080.62 on two trades for the month. New program Bam 90 ES performed admirably in its debut month at Attain +$2,475 on five closed out trades. The program is unique in the fact that it can and will enter into multiple contracts at various levels (increasing risk and potential reward). Waugh Swing ES was able to cling to a small increase of +$90 for the month of July while other results were as follows: Ultramini ES -$1,037.50, AG Mechwarrior ES -$1,672.17, Strategic ES -$2,180 and Strategic SP -$10,325.
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.