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Managed Futures Strategy Focus: Stock Index Traders

December 29, 2008


We talked about not all managed futures programs providing their investors with managed futures exposure in our Dec. 1st newsletter titled: “Analyzing Managed Futures Exposure”.

That piece cautioned investors looking for the stress period performance and non stock market correlated performance seen in various managed futures indices, from assuming any old managed futures program (also called a commodity trading advisor or CTA) would provide that exposure.

Not all CTAs provide such exposure because all of them do not trade a long volatility type program which benefits from breakout moves higher or lower. Some are designed to profit from sideways moves, or moves only up or down, and so on.

We want to take that thought a little further down the road in this week’s piece and talk about how some managed futures programs/commodity trading advisors don’t even trade commodity markets at all.

How can that be? Well, consider the seemingly paradoxical nature of the managed futures/commodity trading advisor(CTA) industry. All managed futures programs/CTAs do trade utilizing futures contracts, but not all futures contracts are on commodity markets (there are futures on intangibles such as currencies, stock indices, and even the weather). At the same time, all managed futures programs are typically registered as professional commodity trading advisors. So you have the terms futures and commodities being linked, despite the fact that there are many cases of commodity trading advisors who don’t even trade commodities.

This is like a real estate agent not really specializing in real estate, but matching buyers and sellers of art or classic cars instead. The terminology for the license needed to manage money utilizing individually managed accounts trading futures markets has not caught up with the reality of what these advisors are really trading. It is confusing, to say the least, and its hard to blame someone for assuming a commodity trading advisor automatically provides exposure to commodities.

This linkage of the terms futures and commodities came about because the exchanges started out long ago only with futures on traditional commodities like Corn and Eggs, so there was no such thing as a future without a commodity. This link became so ingrained that even when futures were introduced on non commodity markets in the 1970s, people went right on using the terms futures trading and commodities trading synonymously.

The truth is – just as not all managed futures programs provide managed futures exposure, not all commodity trading advisors (managed futures programs) trade in the commodity markets.

What’s better, a wide or narrow focus?

Now this could all very well fall into the ‘who cares’ category, except that there is a risk of people falling for the commodity advisor equals commodity exposure fallacy. Investors must make sure their commodity trading advisor is actually trading commodities if that is what they are after.

But there is also a negative risk of sorts to consider. That is the risk of unnecessarily eliminating a managed futures program from consideration for a portfolio simply because it doesn’t include commodity exposure.

We know there are many out there who don’t necessarily care what market or markets a manager is trading, as long as their risk/reward profile matches what they are looking for. These people usually think of absolute returns in such a way that it is somewhat contrary to a balanced portfolio. There is some truth in that. If your portfolio is evenly balanced between all sectors, a general decline will pull the whole portfolio down. It won’t pull it down as far as any one sector, but it also won’t be likely to outgain all but a single sector. If you are lucky enough to pick the one winning sector, than you can outperform the combined performance of all the sectors.

Much in the same way, some investors believe the secret to absolute returns does not lie in diversification, but rather in finding a trader who has the ability to make money in a single market across many different conditions in that market.

This leads us to a managed futures strategy type focused on a single market sector (and usually just a single market) This strategy group trades stock index futures on a short term basis, and can best be labeled - stock index traders. These are much less numerous than option traders, systematic multi-market managers, or discretionary CTAs, and are based on the belief that absolute returns are better achieved through knowing one thing (stock index futures) really well rather than being good at many things. (a diversified portfolio).

Stock Index Traders:

Some of the top performers in 2008 (Past Performance is Not Necessarily Indicative of Future Results) have been managers focusing not just on a single market, but on THE market in many traders’ opinion – the S&P 500 futures.

The S&P 500 futures and their e-mini counterpart remain the choice of many index traders because the market remains one of the most liquid markets in the world, with plenty of volume, movement, and easy electronic execution.

Many traders find it difficult to navigate the S&P 500 futures, with its sharp swings and reputation for efficient pricing due to so many players involved (hedge funds, CTAs, mutual funds, investment banks, and so on).

But it is just these swings which draw stock index traders to S&P futures. Consider the effective range of the following markets. Effective range is a term used at Attain to describe the average daily dollars which can be made or lost in a market, and is calculated by multiplying the 200 day Average True Range of a market by its full point value.

You will see that the S&P 500 offers the most “bang for the buck”, so to speak, with a single contract getting you over $7,400 in exposure daily over the past 200 days on average. You can see that is just about 1.5 times the effective range of Crude Oil – which is always assumed to be a much more volatile market.


Value/Full Pt.

Effective Range

S&P 500


$ 250.00

$ 7,445.00



$ 1,000.00

$ 4,740.00



$ 100.00

$ 2,780.00



$ 1,000.00

$ 1,650.00



$ 50.00

$ 1,087.50

Source - Attain Capital Data, ATR = Average True Range

You can always trade more contracts in a market like Corn or Bonds to equal the higher effective range of the S&P 500, but managers gravitate to the S&P 500 precisely because they can get so much exposure/opportunity with just a single contract. This keeps down on costs.

And with such a high value for the full size contract, the e-mini S&P 500 contract provides much sought after granularity for index traders. What does granularity mean? It means they can get the size they want when they desire to do so. It is the opposite of one size fits all. A corn contract can’t go below 1 lot, for example, whereas an e-mini contract allows the trading of 1/5 of an S&P future. Meaning there are many more “sizes” available in the S&P 500 futures vs markets with no mini market or illiquid mini markets. This characteristic also allows for more advanced trading methods such as scaled entries and exits, partial profit targets, and more.

There has also been no shortage of movement in the stock index futures (and S&P 500 in particular) over the past two years. And indeed the very thing which has hurt most stock index option selling managers the past two years has played right into the hands of non option traders utilizing stock index futures as their medium of choice. The “thing” is a significant increase in volatility, which has equaled more opportunity for stock index trading managers because of the larger magnitude moves back and forth.

Just imagine moves of 10 points per day on average two years ago, where an index trader might hope to make 50% of the move (5 pts) versus average moves of 30 points per day now. The index trader can make 3 times as much thanks to the increase in volatility without changing anything, or can look to make the same amount (5pts) while greatly reducing the time in the market and risk.

The cons for index and other single market traders are numerous, however; and for that reason we only recommend a single market manager as part of a larger portfolio.

One obvious con for a stock index trader is that you are not diversifying from stock indices. You could be long with the managed futures program, and long with your normal mutual fund investments, causing for twice the pain. The index trader would likely be a hedge to your normal stock portfolio more often than not, but it will definitely cause those already long stocks some angst when the index trader is looking for stocks to rise.

Another con is the reliance on a single market. What if volatility completely dries up in S&P 500 futures? Will they press to try and keep returns at the same levels? Will there be any opportunity for profit? What if there were opportunities elsewhere but they are waiting for the opportunity to return to their single market?

The rebuttal to these cons would likely be that it doesn’t make sense to diversify into non producing programs just for the sake of diversifying. That is doesn’t make sense to take losses in order to avoid losses. This argument misses some points about protecting against the unknown, but we can understand its base principles. We can understand the desire to get involved with something if we like the absolute returns it provides, and that is the main driver of investment into single market managers.

Brief reviews and links to two index trading managers in particular that have honed their skills on the S&P 500 and specialize in trading it are below.

Paskewitz – performance

It is odd to find a stock index manager with a $500,000 minimum, but that’s exactly what you get with Paskewitz Asset Management, who is going into their 6th year of being a “non-commodity” managed futures program.

Some investors have questioned the need for such a large minimum (500k) on Paskewitz noting his use of one single market but the need for this capital requirement is a result of running 3 independent sub systems with strict money management overlays on each. Any less capital, and one of the subsystems may ‘pass’ on a trade, thinking it too risky; which would then throw off the “partnership” between the three subsystems.

Like many stock index traders, Paskewitz’s model is a contrarian strategy which looks to identify tops and bottoms on a daily basis, and looks to quite simply, buy the bottoms and sell the tops once they are identified. The worst environment for them is a market environment such as we saw in October where there were several consecutive days which move in the same direction. (making for an extended breakout from their indentified top or bottom).


We did a spotlight on Pere not too long ago (View it here), and can repeat here what we said in that spotlight – this program is not for everyone. It is best viewed as the Ferrari of CTAs, with the possibitily of large gains and large losses. As an example, Pere followed a 100% return in September with a -55% loss in October, bringing accounts all the way back to where they started. (Past Performance is Not Necessarily Indicative of Future Results)

The source of Pere’s volatility is with the strategy being a pure reversal strategy which is always in the market, either long or short. It is also a bit of a contrarian strategy, fading moves higher or lower by going in the other direction. Because of that, similar environments will benefit Pere, with oscillating markets the best, and run away markets for many consecutive days the worst for the program.

NDX - While not an index trader, we would be remiss without mentioning the NDX programs in the same breath here. NDX Abednego and NDX Shadrach are similar to the stock index trader strategy group in that they also trade just a single market – but that market is Lean Hog futures instead of the S&P 500.


So don’t just dispel a program because it only trades a single market, or because it only trades the stock indices. For certain portfolios, such a program can be a fit. Just as the e-minis can give trading granularity (the ability to divide up into smaller units), an index trader can give a portfolio granularity, in that you can add just a single market sector without having to add an entire diversified portfolio along with it.

These programs are also ideal candidates for investing in a drawdown – as their single market focus lends itself more to quick bounce backs. Just think, they only need a single market to start going back their way rather than several markets and trends as a diversified program would.

The single market managers surely are not for everyone, and likewise the stock index managed futures programs should be considered in light of your other managed futures programs and overall portfolio outside of alternative investments. (how much stock exposure do you already have?). But they can be a fit for more aggressive investors who are comfortable taking on risk in terms of less diversification in the hopes of achieving absolute returns.

- Walter Gallwas


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Feature | Week In Review: Energies continue sell off, but grains rally | Chart of the Week


The abbreviated holiday week was light on volume, but that led to higher volatility for some sectors. The energy sector continued to head lower despite OPEC’s production cut announcement followed by news out this past week that UAE would cut even further on their own. For the week RBOB Gas fell -12.93% Crude Oil dropped -10.98% and Heating Oil shed -10.58%. Natural Gas futures gained +7.47% due to cooler weather reports for both the U.S. and Europe in the coming week not to mention word that weekly stocks fell more than anticipated.

The commodity and food sectors experienced higher activity in some areas especially in the grains on news of stronger Soybean exports along with weather forecasts indicating the drier pattern in the Southern Hemisphere could damage crop potential if it continues to persist. The grains were led higher by Soybeans +8.89%, Corn gained +7.77% and Wheat ended +6.11% higher. The soft sector was mixed with Cotton up +2.16% followed by Cocoa +1.29%. OJ fell -6.19% and Coffee was -2.39% lower. In the livestock sector Lean Hogs ended the week -4.56% on export concerns to Mexico and Live Cattle fell -.88%.

The metals sector fractured some during the past trading week as Platinum +4.47% and Gold +3.98% seemed to attract support from hard asset investors that are spooked by current world economic conditions. The rest of the sector seemed to fall prey to the same ideals that the slower world economy would reduce usage, especially in the industrials. Weekly numbers showed Silver down -2.95%, Copper shed -1.84% and Palladium fell -1.19%

Stock Index futures finished the week with a lower tone as the stigma of poor economic conditions and further deterioration in the corporate sector continues to be too large of a burden to shed. The retail worry also hung over the market during Christmas week as further signs point to disappointing holiday sales figures. For the week Russell futures ended -2.19% lower, NASDAQ futures shed -1.96% S&P 500 futures fell -1.61%, Mid Cap futures lost -1.26% and Dow futures finished down -0.82%.

In currencies, the British Pound fell -2.27% and Japanese Yen lost -1.75% on news of more economic woes for each country. The U.S. Dollar Index also shed -0.99% as investors continued to migrate away from the Greenback into the other European backed currencies. The Swiss Franc added from the previous week’s sharp gains adding +3.28% and the Euro finished the week up +0.91%. 30-year Bond futures ended up +0.65%, and 10-year Notes futures gained +0.63% as support continued to emanate from the recent moves by the FOMC.

Managed Futures

Systematic Multi–Market managers stayed quiet last week as the markets slowed down for the holidays. In the past, the markets will exhibit an annual phenomenon called the Santa Claus Rally, where the markets rally higher into the New Year in celebration of the season. However, this year Santa Claus is nowhere to be found and the markets seem destine to remain choppy and complacent into the New Year. With this in mind not many new positions were added last week due to limited opportunities in the marketplace, although some managers did see some gains on existing trades.

With only two trading days left this month the top performing program this month is Lone Wolf Investments Diversified program with estimated returns of +2.85%. Not far behind are Hoffman Asset Management at +2.46% (est) and Attain Portfolio Advisors Modified at +2.41% (est). Other top performing managers this month include Clarke Global Basic with estimated returns of +1.80% and Clarke Global Magnum with estimated returns of +1.58%. Robinson – Langley is also in the black at +0.74% (est).

Programs that are looking for a quick recovery in the last week of the month/year include DMH Futures at -1.59% (est), Attain Portfolio Advisors Strategic Diversification at -2.00% (est), Claughton Capital at -3.87% (est) and Dighton USA at -28.76% (est).

Finally, Paskewitz Asset Management who specializes in trading E-mini SP only, is up +2.48% approximately in the first month of trading at Attain.

For most option trading mangers, the last 2 weeks of the calendar year have historically been "gravy" to the bottom line - This is a result of holiday markets typically being slower / less volatile and option sellers relying on the deprecation of the time value of options they trade - Heading into the last few days of 2008 this year is following a similar pattern. Current estimates are as follows: ACE Investment Strategist +8.95%, Cervino Diversified +0.74%, Cervino Diversified 2x +0.88%, Crescent Bay PSI +0.52%, Crescent bay BVP +1.59%, Rathiel +0.48%, and Zenith has not traded. FCI is the lone exception, as the rally in the Euro against their short Euro calls have left them down -9% for the month.

Agriculture and Grain traders have been posting a mixed bag of estimated returns throughout the month. Current estimates are as follows: NDX Abednego +1.49%, NDX Shadrach +6.45%, and Rosetta -1.8%.


With most domestic markets closing early last Wednesday and nearly all global markets closed Thursday in observance of Christmas, trading activity was lackluster to say the least. The abbreviated week kept many trading systems on the sidelines last week, and will likely have the same effect this week with the New Year’s holiday (U.S. markets closed on Thursday). Look for activity to resume once we get through the holidays, and even further after inauguration.

Starting with the day trading systems, Compass SP hit the nail on the head with its only trade of the week that added +$2,093. BetaCon 4/1 ESX missed on its only trade for -$280 while Rayo Plus Dax dropped -$711. Waugh eRL traded twice for losses totaling -$845.

Moving on to the swing systems, most programs held their respective positions with little movement across stock and bond markets. Two exceptions were Strategic ES which finished the week +$251 and Ultramini ES -$105. Mesa Notes continue to hold short in the Ten Year Note, while the Signum programs are holding long in the US, TY and EBL. AG Mechwarrior ES issues orders on a few occasions last week, but did not have any trades.

In long term trading, grain markets came roaring back towards the end of the week without much change to the fundamentals-probably the combination of being severely oversold and lack of liquidity driving the prices higher. This went against the open short positions of many long term programs. Meanwhile, energy markets had a similar feel at times but finished the week down ~ $5 per barrel to pad to open trade positions for trend following programs short energies.

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.