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Managed Futures: Time Window Analysis

March 8, 2010

 

Which of the charts below looks more like an investment you would be interested in?

I’m willing to bet you said ‘Option 1’, with its nicely upward sloping equity curve and significant all time gains, over Option 2, which appears to have been heading down, down, down for nearly 5 years.

Past Performance is Not Necessarily Indicative of Future Results

      

 

What if I told you these are the same program? Would you believe it? Would you believe that they represent little more than looking at the same program in terms of all time gains versus a rolling 12 month time window analysis.

They are in fact the same program, Rosetta Capital, looked at in two very different ways. Option 1 shows us the ever popular ‘growth of $1,000’, which is the industry standard way of showing a programs compounded returns over time graphically. Option 2 shows the exact same program, with the same monthly returns and all time gains, but instead of looking at the cumulative gain of the program, looks at the program on a rolling 12 month window, with each data point representing what an investor would have been up or down over the preceding 12 months.

Too often we think in terms of ‘who is best’, ‘how much would I have made’, and so on – which may be a habit forced upon us by the industry (Attain included) and our use of the nice upwardly sloping cumulative equity curves as represented by Option 1.

What if we changed the way we look at investments to instead consider how the investment has performed across a time frame I am interested in? Most investors unfortunately have a pretty short time window in which they want to see a new investment perform, so why not analyze an investment on that time frame. We regularly urge investors to give a new investment in a managed futures program two to three years to play out, but the norm for most is usually giving a program only 12 months or so of leeway.

The problem is that even with this short time window of 12 months,  most investors are using the first chart above to base their investment on, when the chart which actually matches their likely time window for the investment is not the cumulative all time chart, but instead a chart of the rolling 12 month returns.

Some may argue that they pay attention to the annual returns the program has experienced, but unless you only invest in new investments on January 1st of each year, the annual returns really mean very little for what you can expect in the next 12 months of your investment.  The use of rolling returns help us get away from fixating on the all time gains and calendar year returns.

Rolling returns simply require a monthly calculation of the return for the previous xx months (in our example above – 12 months). A rolling 12 month return chart will show you the 12 month return for each 12 month period in the track record – so you can see how the year over year performance was for Jan’09- Dec’09, Feb’09- Jan’10, Mar’09- Feb’10, Apr’09- Mar’10, and so on; for example.

The brain seems to see the downside more in a rolling time window analysis chart than it can in a cumulative equity chart, which probably has something to do with some internal greed mechanism in our brain causing our eyes to focus on the up periods and glance over the down periods as just part of an overall upwardly sloping curve.  

With the rolling time window analysis, the brain instantly sees a more volatile curve – with low points going down into negative numbers in more cases than not. This instantly puts us on the defensive, asking the questions we should be asking from the get go, such as how much am I willing to be down over the next 12 months in order to see this investment through.

This same data can be seen on a regular cumulative chart, but it is hard for our brains to grasp that a program with an annualized rate of return of +35% which has never had a losing calendar year, for example, could have a negative value (or several) in its rolling 12 month time window analysis. We just can’t see it the same way we can when looking at it on a rolling basis.

Armed with this new method, the question for many investors ceases to become who has performed the best, and switches over to an oddly phrased – ‘Who is least worst?’

Who is the least Worst?

When asking this question, we’re trying to see who has the highest low point in their rolling time window analysis chart.  No matter what is going on with the rest of the program in terms of compound annual rate of return, maximum drawdown, years profitable, and so on – it might not matter if you aren’t willing to accept at least the worst 12 month rolling return in the program’s history.

Remember, even programs which have never had a losing year can have a negative 12 month rolling rate of return (if the losses were from June through May, for example) – so you need to be willing and able to live through a program’s worst rolling rate of return, not just its worst max DD and/or worst calendar year rate of return.

You can see in the chart below that it is quite rare for a managed futures program to be positive in each and every 12 month window, with only 2 out of 38 programs on Attain’s recommended list and watch list having positive lowest 12 month rolling returns.

Past Performance is Not Necessarily Indicative of Future Results

This tells me that there will be some tought times no matter what managed futures program you invest in (and similarly, no matter what investment you invest in outside of T-Bills), but instead of that scaring you away from any program – consider instead finding those programs whose bad times you can live with. Much like the old saying, you're only as strong as your weakest link; a managed futures program may only be as strong as its worst 12,24, or 36 month rolling return (depending on your time frame). So identifying those with the 'least worst' rolling rate of return, or those with the strongest weakest link - can go a long way to making sure you stick with that program for the long haul. 

Looking at the programs with the 'least worst' 12 month rolling rate of return is a sort of ranking in reverse – which allows us to see which programs were the best while at their worst. It’s like skipping over the average rating for a restaurant, and instead skipping down to the negative reviews to see if you could take the worst they have to offer.  

The least worst programs on our expanded list of 38 managed futures programs are listed below. We’ve included the 12 month rolling return window, and the 24mo and 36mo for those investors who wisely have a little longer time frame for judging an investment.  

Past Performance is Not Necessarily Indicative of Future Results

 

 

 

 

Worst 12mo

Emil van Essen -Low Minimum

 

6.38%

Mesirow Financial - Low Volatility

-0.41%

Mesirow Financial - Absolute Return

-1.25%

Paskewitz - Contrarian 3X

 

-1.28%

Dominion Capital - Sapphire Program

-2.31%

*programs with at least 2yrs of 12mo rolling returns

 

 

 

 

 

 

 

 

 

Worst 24mo

Paskewitz - Contrarian 3X

 

30.41%

Accela Capital Management Global Div.

10.55%

P/E Investments FX Strategy - Standard

5.85%

Attain Portfolio Advisors - Strategic Div.

5.10%

Dighton Capital

 

 

0.79%

*programs with at least 2yrs of 24mo rolling returns

 

 

 

 

 

 

 

 

 

Worst 36mo

Paskewitz - Contrarian 3X

 

56.74%

Accela Capital Management Global Div.

44.01%

Dighton Capital

 

 

28.77%

Covenant Capital - Aggressive

 

25.73%

P/E Investments FX Strategy - Standard

23.03%

*programs with at least 2yrs of 36mo rolling returns

 

 

Whatever your investment horizon or window of time you are willing to give an investment to prove itself to you – it pays to consider the performance of your investment on that time frame before investing. And be honest with yourself. Many investors talk a big game, saying they know it’s unwise to jump in and out of investments, and promise to give it 2-3 years. But as soon as a drawdown comes, those same investors are usually dusting off their redemption papers and looking to bail on the investment.

Armed with the worst 12, 24, or 36 month performance of your investment – you should be able to weather the drawdown phase a little better and have a metric for judging how your investment is doing. Absolute return investments (those that are supposed to do well no matter what the market is doing) can drive you crazy with their lack of a benchmark (most find comfort in knowing they are down, but so is the overall market; but there is often no such comfort in alternative investments which aren’t tied to any specific benchmark). In many ways, the only benchmark many managed futures programs have is themselves. Judging a program by its current rolling rates of return against previous low points for the rolling rate of returns can give you that benchmark you’re looking for and provide statistics to help make decisions on whether to keep going with a program (past 12 months) or put it on the bench.

IMPORTANT RISK DISCLOSURE


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Feature | Week In Review: Stocks edge back towards 18mo highs,taking volatility out of market

***Overview***

A slew of better developments from the U.S. economic sector followed up by some merger/ acquisition news and subsiding fears about the health of the European financial system after members of the EU agreed that they would come to the aid of Greece helped spark a nice rally in the stock index sector last week.  Russell 2000 futures +5.81% led the way higher followed by Mid-Cap 400 futures +4.15%, NASDAQ futures +3.68, S&P 500 futures +3.00% and Dow Jones futures +2.27%.   

The feeling of possible stronger future economic growth for the U.S. also filtered into the energy area despite reports that current supplies are very plentiful. RBOB Gasoline +3.80% led the advance followed by Heating Oil futures +3.05% and Crude Oil futures +2.31%. Natural Gas -4.57% was again hampered by heavier than expected weekly supply and spread trading against the balance of the complex.             

The posturing by EU countries to help Greece get through current debt issues helped currencies end in a mixed state for the week. The rally in the U.S. Dollar +0.02% albeit slight, did hold its momentum versus the other major foreign currencies.  The Japanese Yen -1.44% led the balance of the complex lower followed by British Pound -0.67%, Swiss Franc -0.09% and Euro ending -0.06%. 

The rate sector continued to be victimized by another round of better economic reports. The 30-year Bond futures ended -0.85% and 10-year note future shed -0.12% for the week.     

Commodity and Food products were mostly lower as worries of crop problems in the southern hemisphere subsiding with long term weather patterns drying out. In the grains for the week Wheat ended -4.97% followed by Corn -3.50% and Soybeans -1.91%. Lower U.S. production for livestock was also a main market feature as sector continued to show further upside momentum with Live Cattle +1.12% leading the way followed by Lean Hogs +0.41%. Soft sector price action was hampered by ideas of better crop prospects due to improving weather conditions.  Sugar -7.97% led price declines followed by Cocoa -1.78%, Coffee -0.61% and Cotton -0.04%.

Managed Futures

March has started out slow for multi-market managers with only two programs posting positive numbers so far.  Leading the way is Accela Capital Management Global Diversified, which is up approximately +2.00% this month.  Accela is a global macro product that has exposure to stock, commodity, currency, and fixed income products from around the world.  The extra diversification is paying off this month as this program is handily outperforming the other multi-market products we track.  Other multi-market programs in the black include Robinson Langley Capital Management +0.67% est., as well as 2100 Xenon Managed Futures (2x) Program at +0.30% est.

There is a large group of programs near breakeven for the month including Dighton USA Aggressive Futures Trading, DMH, Dominion Capital Management Sapphire, Clarke Global Basic, Clarke Global Magnum, Hoffman Asset Management, Mesirow Financial Commodities Absolute Return, Mesirow Financial Commodities Low Volatility, and Sequential Capital Management.  Each of these programs has had little or no trading activity this month.

Programs in the red include GT Capital CTA Dynamic Trading -0.13% est.,  Integrated Managed Futures Global Concentrated -0.31% est., Covenant Capital Aggressive -0.55% est., APA Modified -0.57% est., APA Strategic Diversification -0.66% est., Quantum Leap Capital -0.75% est., Futures Truth MS4 -3.36% est., and Futures Truth SAM 101 -6.79% est.

In general, most Option Trading Managers have started off March near breakeven to down after posting excellent returns in both January and February.  The current estimates are as follows: ACE – SIPC -2.89%, ACE – DCP -0.52%, Cervino Diversified Options -0.09%, Cervino Diversified 2x -0.27%,  Crescent Bay PSI +0.07%, Crescent Bay BVP +2.30%, FCI OSS -0.24%, FCI CPP-2.10%, HB Capital +0.04%, and Oak Investment Group -0.79%. 

As a reminder, most premium collection strategies will engage markets that are moving quickly and or ones that have seen heightened levels of volatility (i.e Silver and Cotton) which typically results in a trade turning negative in the first few days of the trading cycle – This is precisely what we are seeing so far this month...Stay tuned to see how these trades turn out.

Specialty Managers have been relatively flat thus far this year, yet appear to be finding some traction in the early days of March.  Agriculture specialist, Rosetta Capital Management is leading the way with estimated gains of +1.81% after engaging several new positions over the past few weeks.  Rosetta, along with most fundamental traders, has been waiting patiently on the sidelines for a sign that the markets are returning to their fundamental pricing…it is too early to tell if now is the time, but things are looking better.  Elsewhere, NDX Abednego is down -0.24% NDX Shadrach is ahead +0.13%, and Emil Van Essen Low Minimum Spread Program is ahead +0.53%. 

Elsewhere, short term index trader Paskewitz Asset Management Contrarian 3X Stock Index  is down -2.73% to start the month after selling into the seven day rally in US stocks.  The 2100 Xenon Fixed Income program is also down at -0.83% est.

Trading Systems

Trading systems had a much better start to the month than CTAs with 12 out of the 15 active systems posting positive numbers last week.  Leading the way is swing trader BAM 90 ES +$2680 after two winning trades.  BAM 90 Single Contract also did well at +$982.50. The top day trading program was Rayo Plus DAX at +870 Euros.  Other top programs include Waugh CTO ERL +$730, Waugh Swing ES +$477.50,  Polaris ES +$395, MoneyMaker ES +$265, Upper Hand ES +$257.50, MoneyBeans S +205, PSI! ERL +$130, Beta Con 4/1 ESX +$70, and Waugh ERL +$50.

Systems that started the month on the wrong foot include AG Mechwarrior -$777.50, Compass SP -$609.35, and Clipper ERL -$320.00.

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.