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Reviewing your managed futures portfolio midway through 2009
June 22, 2009
As we come up on the halfway point of 2009 (its sure has gone by quickly, hasn’t it?), the theme of the year thus far has been reversals of fortune for stocks, hedge funds, and long only commodity investments.
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
After steep losses last year, one could probably expect a bit of a bounce in stocks, commodities, and hedge funds in 2009, and that is exactly what has transpired. It is interesting to note that stocks, hedge funds, and commodity prices were more highly correlated than most people thought during the big sell off in 2008 (there were many questions as to why hedge funds followed stocks lower, instead of providing diversification), and remain closely linked through the first half of the year. All three are involved in one big trade on the health of the world economy, and if we go back to the March lows, those three sectors are likely to all be down double digits again.
And a final note on percentage gains off of steep losses, they look a lot better than they are. If you lose -50% in an investment, for example, you must make 100% on your remaining capital to get back to even. Too many times people think a negative -25% return, for example, followed by a +30% return means they would be up 5%. This is untrue. A -25% return followed by gains of +30% would still leave you at a loss of -2.5%. Keep that in mind when you see the big percent returns for many stocks and commodity markets for 2009.
Measuring against the Market Environment:
Half time in a football or basketball game is a time for the coach to reflect on the progress of his team thus far in the game, and make any changes necessary to remain competitive in the 2nd half. Likewise, the half way point of the year is a great time to take your managed futures portfolio (and your overall portfolio for that matter) in for a checkup, so to speak. What has been working, what hasn’t been? What were the good decisions so far this year, and the not so good ones? What will the second half of the year have in store? And are you set up to capitalize on that?
Unfortunately for those of us in the Managed Futures industry, the list of what hasn’t been working is longer than the corresponding list of what has been working; as commodity trading advisors across strategy types as diverse as spread trading to trend following have been underwater for most of the year. This is borne out in the managed futures index results, with the Credit Suisse/Tremont managed futures index down -5.23% through May.
It is against this landscape (a poor managed futures performance environment), that investors should first view their trading advisor’s performance.
By taking a look at what the overall environment looked like - we can put ourselves in a better position to evaluate each of the components in our portfolio. Without that background information, we may unfairly judge a program's annual performance as poor, when in fact that performance is exactly what we could have expected from such a strategy given the type of market we had.
Investing in managed futures is an absolute return strategy, which means the programs are designed to perform regardless of the environment over the long term - but all bets are off over any short term environment (such as ½ a year). Over any short term period, it is more than likely that a successful manager can have negative performance.
Should we ditch these managers just because they went through a poor market environment? Should we ditch a manager just because they have lost money for us over the short term, when we want them to make money for us over the long term? I would say no. Basing long term investments on short term metrics is flawed logic. And long term doesn’t have to mean 20 years here, it can mean 1 year.
In fact, looking at the rolling 12 month returns for many CTAs tends to give a more complete picture of what to expect over the long term than normal calendar year ending returns. The rolling 12 month period returns can show us what the worst performance over any 12 month period was, and in my opinion that is the number which should be considered when viewing a program’s recent performance. If you should give any investment program at least 12 months, than shouldn’t we be viewing the most recent 12 month performance against historical averages as the metric of how a program is doing? Not the most recent one month or most recent quarterly performance.
Using a rolling 12 month window will help smooth out the normal ups and downs of a program, while looking at the performance across 240 days/12 months/4 quarters means your view will not be skewed towards the current environment. So if a program is down -6% in the first six months of the year, but up 12% over the past twelve months, and the worse 12 month period for the program has been down -3%, is it really time to pull the plug? Again, we say no.
But it isn’t enough to simply say that managed futures as a whole have been down so far in 2009, so don’t worry about under performance in your portfolio. Even if we accept that the average managed futures program is down this year not because they are doing something wrong, but more because of the macro environment for managed futures (thanks to a sharp trend reversal, choppy intraday and weekly conditions, etc) - we should still look at each CTA in comparison with the managed futures indices (their benchmark) and with one another. It is admittedly difficult comparing an absolute return investment to a benchmark (in theory, their only benchmark should be positive returns), but there is real value in comparing a manager you are invested in with its peers during both poor environments and boom times. What are the better performers doing different than the others, and can they repeat that relative success moving forward? Did the poorer performers lose more than their counterparts for some specific reason, or are they just that - poorer performers? These are the type of questions we like to see asked.
The market environment works on the positive side too. 2008 was a great year for managed futures, so if the program you are invested in didn’t see success along the same lines, it's probably time for a hard look at the program to see what the story is. What is the reason for the underperformance?
Reviewing your Portfolio & Looking Ahead:
In reviewing your portfolio, and looking ahead to what you want your portfolio to look like for the rest of 2009, we believe the following elements should all be considered.
1. Investment Window - how much time have I given a certain program - how much more time am I willing to give it? (hint: at least 12 months) How much time have I given managed futures as a whole? (hint: they won’t show their true worth until there is a market crisis) Too often investors jump on a hot program, and then jump off of it at the first sign of trouble. This is a sure fire way to accumulate losses instead of gains, as you are continuously getting in at the top and out at the bottom. One way to combat that urge to get in/get out quickly is to set an investment window for each program you invest in. We recommend you give any program at least two years to show you what it can do. As touched on above, managed futures programs should perform regardless of the environment over the long term, but even the best can suffer over the short term due to a poor trading environment for their type of strategy.
2. Strategy Type - Is my portfolio filled with all option sellers? All day trading systems? All multi-market systematic managers? It's important to assign a strategy type to each program in your portfolio to insure you do not have more exposure than you bargained for in any one area. Many investors had way too much trend following exposure back in 2004/2005 - and then ditched it all and loaded up into option selling programs in 2006/2007 just as volatility spiked, and now may have too much discretionary exposure or the like. While we’re seeing poor performance across most managed futures strategy types in the first half of the year, you can bet that they all won’t stay that way. And without knowing exactly which will start to perform in the second half of the year, it only makes sense to diversify amongst the different strategy types.3. Markets - Do I have exposure to Crude Oil, Wheat, etc.? Do I want exposure to those markets? What markets is my exposure in? Am I overexposed in any one sector? These are all great questions to ask of yourself, and the answers very well may surprise you. Investors are usually much more exposed to stock indices than they think, when the whole reason they invested in managed futures in the first place was to diversify away from stock market exposure.
4. Stop Trade Levels - Drawdowns can and will happen in the future. Do you have a plan, written down, on what you will do when the drawdown hits for one the components in your portfolio? It is important to set a stop trade level for each of the programs in your portfolio, so you don't make emotional based decisions during a stressful drawdown. It is much better to make the decisions right now, with a clear head, on what you will do when a certain program gets to a certain level. Get out some scrap paper, write down each of the CTAs in your portfolio – and write down the max DD you are willing to endure and the worst rolling 12 month return you will accept. Then throw that in an email and send it to us here at Attain. We’ll keep it in your file and alert you when those levels are hit, and remind you there is still room until your ‘uncle’ point if you get a little emotional during a future DD. T
As you can no doubt read between the lines above - diversification is key. Not just in markets, but also in strategy type. The old school method of diversification within managed futures was to diversify between market sectors - but we've seen over the past several years that diversifying between strategy types can go just as far, if not further in smoothing out your equity curve. For more on the various strategy types within managed futures – view the strategy focus section within our newsletter archives here:
It is also important to remember that the best performing portfolio over the past 3,5, 10 years or whatever you're testing is in most likelihood not going to be the best performing one over the next 3 years. No one wanted to include the multi-market systematic (formerly known as trend followers) after flat performance in 2005, and 2006 - but those programs were the stars in 2007 and 2008.
The markets are ever changing, and no one knows what the rest of 2009 and beyond will bring. But we should expect the unexpected, not fear it, and make sure we are spread out between as many market and strategy types as possible. So work with a managed futures specialist at Attain to review what has happened, where you think markets are headed moving forward, and which programs will give you the best chance of success given those assumptions. A little bit of planning now could pay a lot of dividends in the future.
- Walter Gallwas
IMPORTANT RISK DISCLOSURE
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The weaker bias that began last week filtered into trading activity in most futures/commodity sectors. Recent inflationary related activity continued to ebb with trading focused more on supply/demand scenarios. Economic news continued to be split, although reports leaned to a more negative bias, especially when word from some institutional analysts pointed to a more meager global economic outlook. The headline news from the geopolitical front with protesters testing the will of the Iranian governing body inquiring about possible voter fraud and on growing tensions between North Korea and the rest of the world with the U.S. indicating it would beef up security of Hawaii on worries of a possible missile test by the North that could possibly reach the islands. Asian news was fairly quiet although there were a few rumblings that expected economic growth might not reach recently revised estimates. Overall, U.S. equity index futures led the market place into a softer tone with the Dow futures -3.00%, the largest mover of the group. The balance of the sector ended with the Mid-Cap 400 futures -2.83%, S&P 500 futures -2.66%, Russell 2000 futures -2.20% and NASDAQ futures -1.45%.
Futures activity for metals was victimized by worries of lower worldwide economic growth along with the firm aura of the U.S. dollar which seemed to ease the inflationary buying the sector had recently experienced. Industrial metals led the way down with Copper -5.10% followed by Silver -4.53%, Platinum -3.73, Palladium -3.13% and Gold -0.48%.
Energy futures ended the week in a tailspin as the marketplace turned its attention back to supply/demand scenarios after previously posting a nice rally on seasonal factors. Reports continue to indicate heavy supplies are still a norm despite warm weather and seasonal upticks in usage. For the week RBOB Gasoline futures ended -5.31%, Crude Oil futures -3.75%, and Heating Oil futures -2.60%. Natural Gas futures ended the week +3.00% on news of higher usage due to the increase in U.S. temperatures.
The Commodity and Food sectors were mostly lower last week with grains ending lower on carryover positioning after the recent USDA monthly release on Supply/Demand showing both corn and wheat stocks domestically and abroad in good standing. Soybean futures fell on news that demand could have seen a peak from Asian interests in U.S. supplies. Soft commodities continued to be pressured by higher supplies along with news of better growing conditions for new crops. The livestock sector ended higher on better demand as product prices stabilized after recent declines. For the week Cocoa ended -9.94%, Coffee -9.08%, Cotton -8.28%, Soybeans -6.54%, Corn -6.30%, OJ -6.29%, Wheat -4.62%, and Sugar -1.53%. In the Livestock Lean Hogs added 2.71% and Live Cattle ended +0.56%.
Activity in currency futures led to the Japanese Yen advancing against the balance of the complex mostly due to news that consumer confidence in Japan jumped unexpectedly. News of further promise in U.K. and U.S. economic conditions helped both the British Pound and U.S. Dollar. For the week the Japanese Yen +2.18 led the rally followed by the British Pound +0.38% and U.S. Dollar +0.05%. The Euro Currency -0.53% and Swiss Franc -.30% ended on the negative side of the crosses. The Rate sector eked out a slight increase with the 30-year Bonds +0.15% and the 10-year Notes +0.01% on further indications that auction participants may back off after a recent strong advance in yields.
Choppy market conditions across most commodity sectors continue to plague multi-market managers in June. Managers of all time frames including long-term, intermediate-term and short-term traders have all struggled and no one seems immune to the bumpy conditions. Economic uncertainty has caused most of the choppiness as conflicting economic reports have caused commodity prices to fall, rise, and then fall again over the last few weeks of trading. Despite the struggles, one trader that has been able to make money in these tough times is the Vankar Trading Corp. Emil Van Essen program which is up approximately 0.35% for the month. This program has been successful because is a spread trading strategy and does not use traditional trend following strategies that are more likely to struggle in recent market conditions.
The end result of the tough trading conditions is that most multi-market manages we follow are down for the month. Some managers have been able to weather the storm and are hanging in there in light of the difficult trading conditions. Those closer to breakeven include Clarke Global Basic +.10% est. and Clarke Global Mangum +0.02% est. which are up slightly for the month, while Dighton Capital USA Aggressive Futures Trading is at 0.01% est. Mesirow Financial Commodities Absolute Return Program is only down slightly at -0.18% est., while the Mesirow Financial Commodities Low Volatility program is down -0.04% est.
Other managers in the red include DMH at -0.47% est., the Attain Portfolio Advisors Strategic Diversification Program at -0.82% est., Integrated Managed Futures Global Concentrated -1.57% est., Lone Wolf Investments LLC Diversified -2.38% est., Futures Truth MS4 -2.72% est., Robinson-Langley Capital Management -3.93% est., APA Modified Program -4.70% est., Futures Truth SAM 101-4.74% est., and Hoffman Asset Management -7.29% est.
Short-term stock index traders have fared slightly better than their multi-market counterparts so far in June. MSLO is up +0.47% thus far in June while Paskewitz Asset Management Contrarian 3X Stock Index is up approximately +0.12%.
After a brief reprieve in May, most Option Trading mangers have officially resumed their 2009 upward momentum. The top performer for the month and year to date has been FCI CPP – the CPP program is ahead an estimated +7.51% for June and +22.4% for 2009. CPP was only made available to the public in January after having been traded exclusively within the mangers hedge fund since May 2006. For more information on the program please call or e-mail us at email@example.com.
Other option trading estimates for June are as follows: Ace Investment Strategist +1.7%, Cervino Diversified Options +0.91%, Cervino Diversified 2x +2.19%, Crescent Bay PSI +0.48%, Crescent Bay BVP +1.33%, FCI OSS +4.18%, and Raithel Investments +1.0%.
Agriculture and Grain traders continue to view the current market as abnormal from a fundamental perspective and therefore have remained relatively inactive throughout the past 20-45 days. With that being said, Rosetta did engage the markets early in the month for a brief period only to give back approximately 5% on the position. NDX initiated their first position last Friday and are currently down -0.38% in both Abednego and Shadrach.
Trading system results were mixed last week with about half of the day and swing systems able to capitalize on the trading conditions while the other half were caught spinning their wheels. We are starting to see some negativity creep back into global equity markets which could mean an increase in the corresponding volatility which should benefit trading systems in the near term.
Using the day trading systems as a starting point, Rayo Plus 1815 Dax was the top performer +€2,095 while sister system Rayo Plus Dax was +€1,262.50 on two more trades than the former. Compass SP and ATB TrendyBalance v1 Dax were also able to keep their heads held high +$790 and +€690 respectively. Upper Hand ES was also able to stay above water +$257.50 on four trades.
On the losing side, Viper II ES lost -$39.12, BetaCon 4/1 ESX -€190, ATB Welcome v2 Dax -€472.50, Waugh ERL -$1,001.70 and Clipper ERL -$1,020.
Elsewhere, swing system performance mirrored that of their day trading counter-parts with results on either side of the unchanged mark. Jaws US 60 was the sole survivor last week +$1,393.12 on two trades for the week. On the losing side, AG Mechwarrior ES was -$482.50, Strategic ES -$1,285 and Strategic SP -$5,800.
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.