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Are managed futures done with the poor 2009 conditions yet?
May 3, 2010
With 1/3 of the year behind us already after April came to a close last week, managed futures are holding their own thus far in 2010 with the various managed futures indices up slightly for the year at YTD returns between +3% and +5%.
But these indices, and several individual programs tracked by Attain, unfortunately remain in drawdowns, not having seen equity highs since Dec ’08-Mar ’09 depending on the program/index. Some programs haven’t been able to match the positive 2010 performance either, with down (albeit small) performance thus far in 2010. This begs the question of whether the poor 2009 conditions for managed futures have persisted into 2010.
As we reported in our Managed Futures 2010 Outlook, those poor conditions in 2009 were driven by a couple of main factors in our opinion:
1. A sharp drop in Global Volatility (across market segments)
2. Continued high cross-correlations amongst previously non correlated markets (especially the inverse relationship between nearly every other asset in the world and the US Dollar), causing markets to ignore their fundamentals
Investors want to know when we’ll be seeing new equity highs for the indices, and more importantly – when the individual programs they are invested in can expect new equity highs, and a big component of any such turnaround will come from an improving overall market environment for managed futures.
So where do these three ‘conditions’ now stand, four months into 2010? And more importantly, what is the forecast for them moving forward? Will conditions improve, stay the same, or deteriorate through the rest of the year?
1. Global Volatility Increasing or Decreasing?
We wrote the following in the 2010 Outlook: we see an end to the across the board volatility decline as global markets return to a more normal 50/50 split between markets seeing volatility increases and volatility decreases. This should be to the benefit of nearly all managed futures programs – as the number of trending days across all markets will increase, and moving average cross overs will decrease (meaning less false breakouts and quick retracements), but especially to the systematic programs which were amongst those who struggled most in 2009.
We have not been vindicated on this call yet, as global markets have continued to decline across the board in the 44 markets we measure for this statistic across the stock index (12), bond (8), currency (6), grain (6), energy (3), metals (3), softs (3), and meat (3) sectors. And it isn’t just that there are more decliners than advancers, the number of markets seeing volatility decreases has actually increased over 2009, with 42 out of 44 seeing volatility decreases thus far in 2010 as compared to 40 out of 44 in 2009. But as can be seen in the graphic below, those showing declines are showing lesser declines than last year, and those showing gains (albeit only two markets) are showing larger gains than those which saw increasing volatility last year.
We need only look at the US stock market (until last week) to see how non-volatile things have been over the past few months. Consider that the S&P 500 futures were up an incredible 14 out of 15 sessions between 2/25 and 3/17, and never down more than 1% across a record 36 sessions between 2/24 and 4/15.
Unless you are simply holding that market long, it is hard to make money in a market which isn’t moving any more than 1% in a day; and this lack of movement (and what it does to currency and bond markets keying off stock index moves) remains the main drag on managed futures performance. This, more than anything else, is the reason specific programs like APA, Clarke, Hoffman, and Paskewitz from Attain’s recommended list are down for the year. They simply need back and forth movement for their models to profit.
But are we finally in for an increase in volatility? It appears so in the short term (as seen in the graph below), as the news on Greece and Portugal’s debt ratings and Goldman Sachs’ troubles have caused the 20day ATR in the S&P 500 futures to more than double (a rise of 121%) since April 7th (from 7.08 to 15.7). This news sent stock markets and commodities lower, hurting multi-market programs which were long stock indices, and some commodities like energies and metals. But the short term losses for those programs are more than worth the price if the sell off and resulting volatility signal a more general return to higher volatility levels.
Our in house indicator of trading system performance is also on the uptick, with several volatility loving trading systems having done well over the past two weeks when triple digit Dow moves were to be seen again. See our trading system month in review below for more.
2. Are stocks and commodities still (abnormally) tied to the US Dollar? Does this mean a return to fundamentals?
We wrote the following in the 2010 Outlook: We believe the short US Dollar/long everything else trade will become less pronounced in 2010... If the …correlation between the US Dollar and commodities can return to a more normal 0.00 to -0.40 range; [it]will be a huge boost to managed futures performance…. this relationship took away the risk management properties of diversification for many managed futures programs in 2009, with the Short US Dollar/long everything else link causing many managed futures portfolios to take on the profile of having one large bet on a single trade, versus their design of spreading out many low risk bets across many markets.
This call was more on the money, as the chart below shows that the US Dollar/commodity correlation has continued to rise off of the lows made in October 2009 near the perfect -1.00 negative correlation (where for every 1% down move in the US Dollar, commodities would rise 1%).
And as we expected, this has helped managers such as Rosetta , NDX, and Mesirow, who rely (in part) on the fundamental pricing relationships between cash, forward, and futures markets in the traditional commodities like grains, softs, and meat markets. When markets are simply going up or down based on what the dollar is doing, not on the underlying fundamentals – that can cause headaches for these types of managers.
With US Dollar Index Futures up about 5% so far in 2010, any commodity market also up for the year is proof that the short US Dollar/Long everything else trade is over; as in 2009, nearly every commodity market was trading up when the dollar was down. Markets that are breaking the short US Dollar/long commodity stranglehold so far in 2010 include Gold +7.5%, Crude Oil + 5%, Feeder Cattle + 14%, and Cotton +7.5%.
But there is something else good going on here as well, which is that different commodity sectors have diverged in 2010, with the grain markets seeing losses for the year and foreign currency markets starting to trade on their own volition (Euro down, Aussie/Canadian up).
All in all, it is a much improved picture thus far in 2010 in terms of markets trading on their own merits, and not all belonging to one big global recovery/short dollar mega trade. This improvement as been one of the main reasons behind the positive performance in the managed futures indices and gains for those Attain recommended programs up for the year, in our opinion.
So here in the 3rd inning (1/3 of the way through the year), we’re batting 1 for 2; with the call on volatility off so far, but the unwinding of the short US Dollar/long everything else trade showing some legs so far.
That helps explain the positive, yet small, gains for some managed futures programs, and negative, yet small, losses for some managed futures programs so far in 2010. There are conflicting currents they are navigating – with volatility still not where they want it, but market diversification returning as a valuable diversification tool and providing the potential for profitability amongst different market sectors.
We did mention in the 2010 outlook: If we’re wrong, and volatility continues to steadily decline and markets continue to trade based off the US Dollar an political intervention rather than their own supply/demand structure – option selling and short term strategies (1 to 2 days) are where you want to be. And option selling (especially diversified option programs) are where the best managed futures performance has been so far in 2010, with programs like HB Capital and FCI enjoying nice YTD gains. [past performance is not necessarily indicative of future results]
Is it possible that we could see multiple years of decreasing volatility, just as we saw three straight years of increasing volatility between 2006 and 2008? As the old saying goes, anything is possible. And if that is the case, diversified option selling managers are where you will want to be in the managed futures space (despite them not having a managed futures profile of positive performance during market crises).
But given how far volatility has fallen, we continue to believe that volatility has nowhere to go but up, especially with it moving a bit lower in 2010 thus far, and think long volatility multi-market managers will start to post more normal returns through the rest of the year as more markets start to see volatility breakouts like stock indices may have hinted at over the last two weeks.
If we are in for higher volatility, and it happens across multiple sectors, not just stock indices – look for a period of short term losses for many multi-market managers who are currently in long positions in stock indices and some commodities; followed by better performance as different trends emerge in different markets. Hopefully that short term pain was already experienced last week when we did see volatility spike and previously conflicting positions like long Canadian Dollar, short Swiss Franc were put on, signaling a new cycle.
And if we are in for higher volatility, those who have enjoyed the success diversified option selling managers have enjoyed may want to consider booking some profits and not having those profits compounded. As we’ve seen over the past 16 months, there is definitely a place for a well managed, diversified option selling program in a managed futures portfolio to take advantage of years in which more markets are seeing volatility contraction than expansion. For this reason, we believe resetting your account to the initial value, not cashing out altogether, is the wise move (read more about protecting option selling gains here). This will decrease the money at risk should a volatility spike be in our future, and perhaps cause you to rotate some of that money into currently underperforming multi-market programs – which could set you up to become one of those investing rarities – an ‘in at the bottom/out at the top’ investor.
IMPORTANT RISK DISCLOSURE
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U.S. stock index futures added to their strong March with stable April price action despite worries of sovereign debt problems and a DOJ probe into sales practices of CDO’s during the market meltdown. The marketplace overcame those problems with a boost from a series of strong earnings releases during April with 80% of the S&P500 companies beating early earnings estimates. Russell 2000 futures +5.67% led the rally followed by Mid-Cap 400 futures +4.25%, NASDAQ 100 futures +2.19%, S&P 500 futures +1.56% and Dow Jones futures +1.51%.
Energy futures sentiment continued to gain upside momentum during April as stronger signs of growth helped aid a price rally to new 2010 highs for Crude Oil and its products. For the month Heating Oil +5.70% lead the surge followed by RBOB Gasoline +4.26% and Crude Oil +4.08%. Natural Gas -1.13% remain hampered due to heavy supplies in the U.S. after lighter winter demand.
Food and Grains experienced price growth in most cases last month as anticipation of better demand help overcome heavier supplies in some cases. Grains benefitted from this attitude with Wheat futures +8.41% leading the way followed by Corn futures +5.27% and Soybeans +5.16%. Livestock prices experienced a price rally with tight supplies being the main catalyst with Lean Hogs +4.36% and Live Cattle +0.88%. Soft’s were led higher by Cocoa +7.86% followed by Cotton +2.82% with the balance of the complex other than Sugar ending near steady. Sugar -8.24% was hampered by ongoing reports of ideal growing conditions that could help produce a large enough crop to help offset the current world supply deficit.
Market activity in currency futures for March was mixed despite a possible agreement between the EU and the IMF to protect the sovereign debt of Greece in the case of a default situation. Investors in this sector focused more on yield than any other geopolitical situation which featured support in the U.S. Dollar Index +0.86% and British Pound +0.64%. The Swiss Franc -2.13% was under the most pressure followed by the Euro -1.58% and Japanese Yen -0.46%.
Congratulations are in order to Specialty market manager Emil Van Essen and their Low Minimum Spread Trading Program where they had a banner month earning an estimated return of +8.16%. Despite earning +19.05% in 2009, over the past 12 months, Emil Van Essen had been relatively flat; so, for many investors who have been patiently waiting for 2008 / 2009 type returns their patience may finally be paying off. For more information on the program here is a link to our research report: http://www.attaincapital.com/managed_futures_newsletter/financial_investment_advisor/344
Other Specialty manager estimates for April are as follows: Agriculture traders NDX Abednego and NDX Shadrach were down -0.14% and -0.12% respectively while Rosetta Capital gained +1.99% bringing their 2010 totals up over 5%. Oak Investment Group is an option based Agriculture trader where they returned an estimated +5.78% for the month. Finally, 2100 Xenon Fixed Income Program finished April -0.74% leaving them ahead approximately 1.5% YTD.
Systematic multi-market traders rallied into the month end as trends in energies, currencies, metals and softs prevailed. The top performer for the month was Futures Truth SAM 101 at +6.11%. The Futures Truth team rebounded from a tough month of March and is now looking forward to putting back-to-back positive months together and busting out of their drawdown. Next in line are Covenant Capital Aggressive at +4.61% followed by Clarke Capital Worldwide at +4.40%.
Other multi-market traders that posted numbers in the black include Quantum Leap Capital Management +1.66%, Robinson-Langley +0.50%, DMH +0.50%, Accela Capital Management +0.28%, and Mesirow Financial Commodities Absolute Return +0.25%.
Unfortunately, not every multi-market manager posted positive numbers for the month. Managers in the red include Hoffman Asset Management -0.20%, Mesirow Financial Commodities Low Volatility -0.43%, Futures Truth MS4 -0.55%, Sequential Capital Management -0.70%, 2100 Xenon Managed Futures (2X) -2.00%, APA Strategic Diversification Program -2.07%, Applied Capital Systems -2.25%, GT Capital -2.40%, Integrated Managed Futures Global -2.85%, Dominion Capital Management Sapphire -3.16%, Clark Global Magnum -3.76%, APA Modified -4.19%, -Clarke Global Basic -5.35%, and Dighton USA Aggressive Futures Trading -5.46%.
Option Trading managers ended April with mixed results between both Index and Diversified managers. Financial Commodity Investments CPP was the months top performer earning +3.67%. After ending March the program fought back to profitability during the second ½ of April following some well timed currency and energy market expirations.
Other Option Trading estimates are as follows: ACE SIPC -3.87%, ACE DCP +0.19%, Cervino Diversified Options +0.08%, Cervino 2x +0.22%, Crescent Bay PSI +0.02%, Crescent Bay BVP -0.01%, FCI OSS +2.0%, and HB Capital -0.03%.
Short-term index traders enjoyed success as well with Pere Trading Group +4.74% and Paskewitz Asset Management Contrarian 3X Stock Index +3.46% both posting positive numbers in April.
During the month of April, the trading systems that were actively traded produced some impressive results. Strategic SP traded the rangy action in the S&P 500 market with ease and finished at +$14,475.00. Coming in second was, Bam 90 ES, which had a nice month as well at +$8,645.00. Other positive results were Rayo Plus DAX at +$5,222.50, Strategic ES at +$2,697.50, Clipper ERL at +$2,080.00, Waugh ERL +$1,615.00, PSI! ERL at +$1,605.00, Bam 90 Single Contract ES at +$1,460.00, Jaws US 400 at +$1,195.00, Strategic NQ at +$885.00, Waugh Swing ES at +$715.00, Compass SP at +$425.00, MoneyMaker ES +$167.50, ATB TrendyBalance v2 DAX at +$117.50, Compass ES at +$65.00, and Polaris ES at +$10.00.
Barely missing out on a positive month was MoneyBeans S at -$79.17, and Waugh CTO ERL at -$100.00. Some of the other results were AG Mechwarrior ES at -$245.00, EVP 3 EC at -$424.77, BetaCon 4/1 ESX at -$500.00, Jaws US 60 at -$1,060.00, Upper Hand ES at -$1,502.42, ATB TrendyBalance v3 DAX at -$1,535.00, and Ultramini ES at -$2,385.00.
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.