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Managed Futures 2013 Strategy Review

December 31, 2013

 

Coming into 2013, Managed Futures programs recorded an unprecedented performance of two consecutive years of negative performance, with 3 of the past 4 years in the red (Disclaimer: Past performance is not necessarily indicative of future results), and desperately looking for something to spark a change. It appeared as though change was in the air early in the year as CTAs collectively recorded four straight months of positive performance. Managed Futures was flexing that non-correlated muscle, as stocks continued to climb. Then it was as if something just stopped. The Managed Futures Indices and many of the individual programs we track followed the good start to the year with five months of choppy, inconsistent, and a negative performance.  

Tack a particular media outlet’s war against the asset class and the end of a 30 year tail wind in interest rates onto the choppy conditions in the last half of the year and it felt like a terrible year for managed futures.

But even after the streaky performance and negative press, Managed Futures as an asset class was sitting up 0.53% coming into the last two trading days for the year, according to Newedge. {Disclaimer: Past performance is not necessarily indicative of future results).  Not a banner year, but not exactly the death knell many would have you believe.

In our annual end of year tradition, we take a moment to dig a little deeper into the overall asset class performance number and give some color on the different types of strategies which make up the managed futures asset class (no… it isn’t all trend following). Without further ado, our 2013 Managed Futures Strategy Reviews:

Trend Following:

Trend following is the most familiar managed futures strategy out there, causing it to be used somewhat interchangeably with the asset class as a whole; and the two moved in tandem in 2013 – with trend following strategies as streaky as the asset class as a whole.

Although there were trends to speak of in 2013, there were also choppy periods and trend reversals to contend with.  It all looked good at the start of the year, with the Newedge Trend Index posting a +7.68% from January through April via multiple developing trends. {Disclaimer: Past performance is not necessarily indicative of future results}.  

The notable trends were: Long stock Index (U.S., Europe, Asia), long Cotton, short Gold, short Bonds, and long the U.S. Dollar. The most obvious trend was being Long Stock Indices, and most trend following programs we track were able to capitalize off of the long U.S. Equity Futures position (foreign equity positions were whipsawed in June/July). Couple this with the beginning of the year sell off in Gold, Cotton, and the U.S. Dollar, and trend followers were riding high come the end of April.

But the good times didn’t last for long. Rocky and uncertain conditions hit the market in May, June, July, and August as “taper” talks caused some selling pressure. This caused reversals in bonds, currencies, and (for a short time) stock indices. Profits generated from Trend Followers up to April, quickly deteriorated, and eventually dipped below the breakeven point.

The bottom falling out of the fixed income market in June was a particularly jarring move (even though trend followers should welcome with open arms a rising rate environment), and took a toll on trend followers as evidenced by the Newedge Trend Index falling -9.50% from May through the end of August. The behemoth Hedge Fund Bridgewater was even caught up in the mix, after they levered up the long bond trade.   

This rollercoaster feel continued in the remaining three months of the year as more trends began to develop; notably short Yen and long Nikkei.  From an economic standpoint, Japan has been pushing yen futures lower in an attempt to jump start their economy, which has resulted in the Nikkei rallying significantly (in Yen terms).  Elsewhere, world stock Indices returned to their bullish ways in the 4th quarter, crossing 1700 in the S&P 500 in mid-September and closing on record highs (1830+).

The 4th quarter also saw any program not short gold return to or enter that position, as the sell off there regained momentum and now threatens the June lows, and whoever was on the Natural Gas long train pleasantly surprised, as that energy market came out of nowhere as the surprise long trend to end 2013.

Meanwhile, the beginning of the year trends in the Fixed Income and Currency sectors re-established themselves in many markets (the 10yr Note, Yen, Aussie and Canadian Dollars especially), bring trend followers back to the good side of breakeven for the year – with the Newedge Trend Index up +2.36% with only two trading days left in 2013 (Closing of December 27th).

Trend Trades of the Year: long Stocks (S&P, Nikkei in particular), long Cotton, long Natural Gas, short Yen, short Aussie Dollar, short Coffee.

Overall Performance:  Below Average

Agriculture Traders:

The Chinese would surely have you believe that this was the year of the pig (even though it was the year of the snake). Surprisingly, the agriculture market that grabbed the most media attention this year was weirdly enough coming from a commodity that doesn’t grow out of the ground, rather something that eats what grows from the ground, hogs. For Ag traders, the meat markets (Hogs & Cattle) are considered an Agriculture market just as much as Soybeans or Corn; and part of most Ag Traders portfolios. It wasn’t a sharp spike in pricing that caught Ag Traders attention, but Shuanghui International Holding oinking out $7.1 Billion dollars to purchase Virginia hog producer Smithfield.

But what’s a $7.1 Billion deal without some controversy, and conflicting opinions from the Chinese government? Earlier this year, the Chinese made the decision to ban all U.S. pork imports that contain the additive chemical Ractopamine. On one hand the Chinese are saying no more U.S. pork, and on the other a Chinese firm is buying one of the world’s largest hog producers in the United States – leaving a lot of confusion (or opportunity if you look at the glass half full) on the demand side of the equation.

The second most discussed Agricultural market had to have been Corn’s major sell off; down 40% in 2013 (the largest decline in a commodity market this year). Coming off one of the worst droughts in decades, the USDA reported 97 Million acres of Corn had been planted towards the end of June (the most since 1936). With each USDA crop report, came more predications of a good harvest, and the corn futures prices continued to decline, despite some irregular daily spikes in grains. Since the USDA reported an almost record breaking statistic, corn futures have dropped from $6.50 per bushel, down to $4.23. {Disclaimer: Past performance is not necessarily indicative of future results).

It’s easy to sit here now and say these Ag specialists should have simply been long hogs and short corn for all of 2013, but this trade wasn’t as easy as it looked for most. One Ag manager we work with commenting that the fundamentals (supply and demand data) were not lining up with the technical indicators as they should, clouding the picture a bit.

But on the whole, Ag traders managed the downside well and did participate in some of the moves, such as Soybeans spiking up to $15.50 per bushel during the early summer heat wave before crashing back down in early August.   All in all, we would much rather have a long/short professional commodity trader at the helm than just buying a commodity ETF or the like.

Overall Performance: Fair

Spread Trading:

This year’s spread trading performance was primarily affected by one word: backwardation, particularly in Crude Oil. While most spread trading involves grains, stock index, and meat markets; energy markets are a large component of most discretionary spread programs, with 50% or more of exposure attributed to this sector in some of the main programs.

The post financial crisis period (2009-2011)created a consistent Contango market (near month price lower than future month price) environment for Crude, but that came undone in 2013 as spread traders had to react to Crude experiencing the highest level of backwardation in 15 years.  

The result? Spread traders had small gains at the beginning and end of the year, followed by large losses in June and July when near month Crude Oil futures spiked to 110 while back month contracts remained stable.  

Overall Performance: Poor

Option Trading:

After nearly going extinct during the financial crisis; we discussed (with a heavy dose of caution) in late March if option traders had returned to the golden era of smooth returns in a period of declining market volatility.  And, wouldn’t you know it; just weeks after we wrote the piece – the stock market experienced a volatility spike in April causing the first bout of big losses in the short volatility sector for a few years. This volatility spilled over into May during the “taper” rumors before finally being stomped out when Captain Bernanke publicly announced that no changes to QE were on the horizon.

Fortunately, none of the losses were of the catastrophic Thanksgiving Turkey sort; but the damage was done and proved to be very difficult to overcome with many of the traders we track in this sector finishing 2013 in the red.

All in all, 2013 proved to be a good reminder for traders and investors alike that there’s no free when betting on volatility.

Overall Performance: Poor

Short Term Strategies:

On the flipside, while the uptick in market volatility was a bane for short volatility programs, it was a welcome change for short term momentum traders who posted their best month in years during the month of April. For some, those returns were enough to buoy the programs into a profitable year, for others it was a short term blip in an otherwise depressing market environment.  In any case, it was good to see these strategies step up to the plate when their number was called. Many market themselves as non correlated to the trend following space, and they mostly proved that in 2013 (CTA’s that we consider short term have an average trade hold time of 3 to 6 days).

To be clear, short term isn’t to be confused with high frequency trading, which holds trades for a few seconds at a time. Whether you’re a fan or a critic of high frequency traders, we haven’t seen many CTA’s engaging in these types of trading strategies.  The economics needed to be successful in HFT seem not to fit with CTA space, and seems to be disappearing quickly from the market in general. The short term traders we track employ momentum (think short term trend following), mean reversion (counter trend), or a combination of both across a diversified market portfolio. However, we have seen some slight modifications to short term strategies to respond to HFT. Some traders are now participating in slightly longer time frames on trades to combat the market choppiness which is a potential side effect of the ultra short term strategies employed by HFT.

In terms of performance, short term traders that traded a diverse basket of commodity, bond, currency, and stock index futures outperformed those that stuck to a single liquid market like stock index futures.  Likewise, the smaller to mid-size programs we track were up 7% on average, outperforming the larger names that populate the Newedge Short Term Traders Index. Overall, the index appears to be on track to finish at +3.49% on the year, with only two days of trading left {Disclaimer: Past performance is not necessarily indicative of future results}.

Overall Performance: Average

Discretionary Relative Value (Non Ag):

The discretionary relative value (global macro type) traders left a lot to be desired in 2013, showing little to no signs of any upside. Mostly we’re hearing about a “lack of opportunity” from these folks. However, it wouldn’t be too farfetched to surmise that a post-2008 traumatic stress type disorder is to blame for relative quietness of these programs. The downside losses were certainly limited but it didn’t appear that there was a whole lot of risk taking going on in the first place.

Overall Performance: Stagnant

Overall Summary:

Overall managed futures performance was similar to a light switch where performance was flipped on and off then back on again, and then slowly dimmed back on to close the year. Yes, there were choppy markets. Yes, QE certainly played a (mostly negative) role. Yes, there was an overall lack of volatility. Yes, we’re at the end of the interest rate tailwind.

But throughout all of that, Managed Futures survived on the whole, and in some particular cases thrived given the situation (and in some cases struggled mightily). As the curtains draw down on 2013, and a new stage is set for 2014, we’ll start to put together the stats for our 2014 Managed Futures Outlook. Look for it in your inboxes soon.

All the best to you and yours for a Happy and Safe (and profitable) New Year!

IMPORTANT RISK DISCLOSURE


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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.