Why commodity price declines aren't always a bad thing for Commodity Advisor Performance
October 6, 2008
Another Monday, another assault on Global asset classes......
After we saw 5% to 10% losses in stocks AND commodities one week ago, and wrote on where you can invest during this market crisis (view last week’s newsletter here: http://www.attaincapital.com/managed_futures_newsletter/298), it was more of the same today as US markets took their cue from Asian and European stock markets – falling as much as 8% on their lows of the day.
The lows seen in stocks were levels not seen in 3 to 5 years, with the Dow falling below 9600 at one point. But it wasn’t just stocks that were down today. Commodity markets repeated a disturbing trend seen last week as they sold off in lock step with equities:
10/06/08
S&P 500 = -4.9% Crude Oil = -6.4%
Copper = -7.3% Soybeans = -7.1%
Cotton = -5.2% Lean Hogs = -1.7%
#Source, Attain, front month futures contracts
Commodities Selling Off too
We all see the news on the stock market’s woes every day, and it is depressing news with World Stocks down over -30% for the year, and US stocks down over 35% from their highs last year (on today’s lows). But the sell off in commodities has been nearly as severe, and hasn’t been getting much in the way of coverage. I guess there is only so much room on a news broadcast to cover a looming recession/possible depression, banks going belly up, $700 Billion government bailouts, Warren Buffet snapping up companies on the cheap, and so on – leaving no room to talk about commodities losing nearly ½ their value.
But consider the following Bloomberg piece, http://www.bloomberg.com/apps/news?pid=email_en&refer=home&sid=a9T0Q5lVT1JIt, which explains that the value of the 19 commodities in the Reuters-Jefferies CRB Index fell $280.6 billion, or 43 percent, from its July 3 peak, a loss larger than their total worth two years ago. I guess the calls for commodity speculator’s heads and politicians painting of oil companies as evil doers were a bit overdone and premature. Perhaps now people will understand that the windfall profits built up by oil companies and speculators comes with the risk of giving it all back. Can we get windfall loss paybacks if there is a windfall profits tax?
Just look at some of these sell offs in the past 3 months and 4 days (since July 1st, 2008) when most commodity market were close to all time highs (and compare to the losses in stocks and foreign currencies):
| Stocks | Currencies | |||
| Dax | -15.50% | Dollar Index | 13.00% | |
| Hang Seng | -23.00% | Euro Currency | -14.50% | |
| Dow Jones | -28.00% | Austrailan $ | -26.00% | |
| Nasdaq | -31.00% | |||
| Russell 2000 | -31.00% | Bonds | ||
| S&P 500 | -33.00% | US 30 yr | 5.80% | |
| Volatility Index | 100.81% | US 10 Yr | 4.20% | |
| Energies | Metals | |||
| Crude Oil | -39.00% | Gold | -9.50% | |
| Gasonline | -39.00% | Copper | -38.00% | |
| Natural Gas | -50.00% | Silver | -40.00% | |
| Softs | Grains | |||
| Sugar | -25.00% | Wheat | -34.00% | |
| Coffee | -28.00% | Soybeans | -43.00% | |
| Cotton | -29.00% | Corn | -46.00% | |
Commodity losses don’t mean Commodity Trading Advisor losses
But while these losses may concern oil companies and commodity speculators as the US government’s defines them (those who bet on commodity prices rising), the turn over in commodity prices has not been all that bad (and in many cases has been very good) for what we at Attain would call commodity speculators (those who bet on commodities both on the long and short side, betting on them going up, AND down).
The fact of the matter is that professional Commodity Trading Advisors (CTAs), or managed futures programs, are not investing in rising “Commodity” prices. That bears repeating, commodity trading advisors are not only BUYING commodities and hoping prices go up. They sell commodity futures too (expecting them to go down), and trade options on them, and do delta neutral spreads, and all sorts of other methods in which the price direction doesn’t matter in the least.
The only commodity investments which do rely on commodity prices going up and up are the stocks of commodity producers (mining, energy names, etc) and the long only commodity indexes and ETFs which everyone was running to get into earlier this year. These funds and ETFs are the funds which people are fleeing out of currently (no doubt adding to the downside for many of these commodities, and raising an interesting aside of whether we should now thank the commodity speculators for making things more affordable)
We actually wrote a newsletter on this back in June of this year (about a month short of the top, but not too bad) talking about what would happen to commodity trading advisors if the commodity bubble burst. View the old newsletter here: http://www.attaincapital.com/managed_futures_newsletter/283
The statistics we ran showed a monthly correlation coefficient between commodity prices, as represented by the CRB and CTA performance, as represented by the Tremont Managed Futures index, of only 0.17. A very rough translation of that correlation coefficient means that CTA performance only mirrors commodity prices 17% of the time. A correlation of 1.00 would be worrisome, as that would portend a bursting bubble would mean a bursting of CTA returns as well.
In fact, we found that in comparing the 20 largest losing months of the CRB Index since 1994 and corresponding gain or loss in the Tremont Managed Futures Index during that time, the CTA index averaged a gain, of +0.28% while the commodity prices lost an average of -4.30%.
So please don’t link commodity price movement with CTA/managed futures performance in your head – as they aren’t statistically or fundamentally linked. We know it was popular for many futures brokers to capitalize on the boom in commodities by saying you can get entry into those bull markets through CTAs/managed futures, and while there is some truth to that – the flip side of it is that you can get exposure to the bust in commodities through CTAs/Managed Futures as well.
And this bears through in the performance of the commodity-based (non stock index only trading) managed futures programs on our recommended list, where 9 out of 12 (75%) have seen gains since the commodity sell off began three months ago.
A listing of Attain’s recommended CTAs and how they have performed since the sell off in commodity prices started around July 1st is listed below. (we removed programs such as Pere and Zenith which specialize in stock index trading, as they don’t pertain to the commodity discussion above)
Past Performance is Not Necessarily Indicative of Futures Results
| CTA Program Name | Past 3 mos | YTD | Comp ROR | All Time DD | Min Cap (000's) |
| Clarke Capital - Global Basic | 34.01% | 70.82% | 31.59% | -29.40% | $50 |
| Clarke Capital - Global Magnum | 16.46% | 40.67% | 21.33% | -26.21% | $100 |
| 8.59% | 17.34% | 13.86% | -8.59% | $1,000 | |
| 4.11% | 18.73% | 60.97% | -39.67% | $50 | |
| 3.89% | 1.89% | 4.92% | -14.80% | $100 | |
| 3.49% | 10.18% | 25.96% | -6.48% | $100 | |
| 3.38% | 39.87% | 58.30% | -15.53% | $250 | |
| 2.99% | 30.66% | 55.05% | -36.91% | $100 | |
| 1.62% | 13.23% | 14.51% | -4.80% | $100 | |
| -0.41% | 24.81% | 16.05% | -26.06% | $250 | |
| -1.78% | 12.40% | 32.27% | -16.26% | $100 | |
| -2.96% | 36.66% | 40.15% | -14.00% | $100 | |
| -8.48% | 64.69% | 20.86% | -26.74% | $1,000 | |
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| Past 3 Mos = July1, 2008 through Sep 30, 2008 (estimates used for Sep) | |||||
| YTD = Year to Date, 2008 performance | |||||
| Comp ROR = compound annual rate of return | |||||
| All time DD = worst all time maximum drawdown | |||||
| Min Cap = minimum investment amount, in thousands | |||||
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Important Risk Disclaimer
Managed futures accounts can subject to substantial charges for management and advisory fees. The above numbers include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
The rates of return above represent only the listed period (i.e 12mos, 36mos, 5yrs, 10 yrs). The rates of return for periods longer than the period shown may be higher or lower than those shown. Investors interested in investing with any of the trading programs referenced above will be required to receive and sign off on a disclosure document in compliance with certain CFTC rules. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the performance of accounts under the CTA's management over the most recent five years. Investors interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.
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Finally – the chart of the week section below once again shows the YTD performance of various asset classes chart from last week’s newsletter, updated with fresh estimates through today, Monday, October 6th. This is a very telling chart on what does well in this type of market environment, volatility spikes.
- Jeff Malec
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.
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
***Overview***
What a month! If you were long anything except US Treasuries, you likely lost money, as there were major declines across all asset classes.
The fear of further worldwide economic pressures seemed to come to a head with several governments scrambling to rescue banks and investment institutions that had fallen victim to freezing short term credit markets. Most inflation/economic growth sensitive products continued the slide that began in July as most of metals especially the industrials took the brunt of the pressure. Palladium shed -32.94%, Platinum lost-31.49%, Copper down -14.29% and Silver -23.60% lower. Those are monthly figures!! Wow. Gold, meanwhile, ended with gains +5.28% as support stemmed from safe haven buying with investors looking for hard assets.
Currency activity continued to confirm the idea that global economies the world over will see slowdowns. The Japanese Yen +3.03% and U.S. Dollar Index +1.88% seemed to attract money on ideas that some higher yielding currencies could be in for hard times if the global credit crunch could worsen. The Euro took the most brunt of the pressure -3.19% and the tone was reflected in the performance of other Europeans as the British Pound shed -1.45% and the Swiss Franc lost -1.27%. The gains in the U.S Dollar also prompted a rally in interest rates as the 10-year notes gained +1.79% as investors moved into dollar dominated safety despite the lower outright yields.
The credit crunch really took a toll Stock Indexes as talks of large government rescue plans sparked a mass exodus from the sector. This nervousness was very evident in NASDAQ futures which lost -14.87% as a lack of credit facility would put a strong damper on tech spending in all areas. The other large caps followed suit as S&P futures lost -8.98% and Dow futures fell -6.99%. In the small-cap sector; the Russell shed -8.38% with Mid-Cap losing -6.98%.
Demand destruction seemed to be the term widely used in the Energy, Food and Ag sectors as worries of lost demand due to steep economic slowdowns sparked from the credit crunch led to double digit losses in most areas. The energy sector ended Sept. with Crude Oil -16.92%, Heating Oil -13.49%, RBOB Gas -12.79% and Natural Gas -11.17%. AG sector losses were led by Soybeans -21.63%, Corn -16.28%, Wheat -14.89%, Hogs -7.79% and Cattle -5.77%. Food sector losses started with Orange Juice -20.58%, Cotton -17.96%, Cocoa -11.41%, Coffee -10.50% and Sugar -6.29%
***CTAs***
Multi-Market / Trend Following style managers had a great month in September. We have seen trend following commodity managers do well when the stock market is facing adversity and that theory proved true this past month.
Our very own Attain Portfolio Advisors - Modified Program and Attain Portfolio Advisors -Strategic Diversification Program led all programs with estimated returns of +22.39% and +10.86% respectively. Both programs benefited from a trading approach that includes day trading & swing trading. The shorter term day and swing programs were especially helpful in the volatile stock index and energy sectors. Long term positions in the treasuries and grains also posted nice returns.
The Attain Programs weren’t the only multi-market models to benefit from the increased volatility last month. Other managers that had good months include Clarke Capital Management with estimated returns of +4.77% in the Global Basic program and +1.95% in the Global Magnum program. Next in line was Robinson – Langley with estimated returns of +3.28% followed by Dighton USA at +2.30% (est), Hoffman Asset +1.65% (est) and DMH at +1.10% (est).
On the downside two managers finished September in the red. The first was the Long Term Navigator program at -1.22% and the other was Optimus Capital at -12.70%.
Finally – the Pere Trading Group, LLC program had an almost unbelievable month in September. The program, which swing trades e-mini SP 500 contracts, was up approximately +102.24% (based on $50k) for the month. Obviously, this performance is outstanding and most certainly would have brought out the skeptics in all of us if we didn’t see it with our own eyes. Attain would like to congratulate Mr. Pere on what was a truly historic month of trading in September 2008.
For Agriculture and Grain managers, September was a different story with profits across the board for the few we track. The month’s top performer was NDX Shardrach with an estimated gain of +7.25%. Shadrach is now ahead +36% for the year and +45.3% over the past 1 year (-14% Drawdown max all time drawdown). Other estimates were as follows: Chicago Capital Spread Arbitrage +1.29%, NDX Abednego +4.23%, and Rosetta +3%.
For a majority of option selling CTA's September’s (and now October's) rapid increase in volatility accompanied by extremely wide market ranges has been a grim story (Zenith Investors excluded). Option sellers are designed to profit from sideways and range bound markets, while risking abrupt losses when markets spike in one direction or the other. And that exact scenario they bet against happening has occurred.
For September, the estimated option selling CTA results are as follows: Ace Investment Strategists -53.43%, Ascendant S1 -13.2%, Cervino Diversified -0.75%, Cervino 2x -1.5%, Cervino COP -4.99%, Crescent Bay PSI -7.86%, Crescent Bay BVP -12%, FCI -3.36%, LJM Partners -15.5%, Zenith Index +0.14%, Zenith Diversified +0.20%, Zephyr Aggressive -32.17%, Zephyr Moderate -37.29%.
These results may very well mark the end of the road for many option selling CTAs, as they have given back years of profits in a few short weeks in some cases. In other cases, the ability of programs such as Zenith and Cervino to hold up under a historic spike in volatility (the VIX index hit an all time high today) speaks volumes about those manager’s skill when compared with others who did not fare as well amidst the onslaught of higher volatility.
***Trading Systems***
With volatility on the rise again last month, trading systems were able to capitalize on the slide in global equity markets and the corresponding rally in bond markets. Most day trading systems that traded finished the month deep in the money, while swing systems that were positioned on the correct side of the markets (short equities, long bonds) added to open trade profits.Beginning with the day trading systems, Compass SP had another breakout month, earning +$4,181.62 on seven trades. Also benefiting from the increase in volatility was Waugh eRL which was up +$2,851.50 for the month on fifteen trades. BounceMOC eRL had two trades late in the month for +$820.
On the losing side, BounceMOC eMD lost $720 on one trade mid-month. Additionally, Rayo Plus Dax lost -2,137.50 € on ten trades for the month.
Moving on to the swing systems, Bounce eRL outperformed its day trading counterpart, pocketing +$1,034 for the month while Bounce eMD dropped -$852 on one trade. Signum TY and EBL both entered the month long their respective markets, then reversed short and finally back to long towards the end of the month. The current long positions have built up significant open trade equity to make up for the loss on the losing short trades. Elsewhere, the Tzar suite of systems came into the month long for the most part, and exited long trades early in the month and re-entered short.
In long term multi-market systems, we continue to see liquidation across all of the major commodity sectors with the exception of Gold (a safe haven for investors). Grains, metals, softs and energies plunged between 10 % and 15 % in September alone. Most long term programs have been holding short in a variety of commodities. The US Dollar also broke above the key $80 level in late September signaling long signals for some programs, as well as corresponding shorts in foreign currencies such as the Swiss Franc, British Pound and Euro.
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.
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
Past Performance is Not Necessarily Indicative of Future Results.
| Rank | Program Name | 12 month Return | 12 month Drawdown | Min Investment (k) |
| 1 | Pere Trading Group, LLC Pere Trading Program | 578.48% | 29.98% | $100 |
| 2 | Clarke Capital Management, Inc. Global Basic | 110.34% | 12.34% | $50 |
| 3 | Clarke Capital Management, Inc. Millennium | 85.41% | 16.84% | $1,000 |
| 4 | Attain Portfolio Advisors Modified Program | 61.45% | 15.53% | $250 |
| 5 | NDX Capital Management Shadrach Program | 45.30% | 14.00% | $100 |
Figures listed are as of 10/06/2008.
IMPORTANT RISK DISCLOSURE
The rankings above are the top ranked CTAs offered at Attain over the past 12 months using a risk adjusted ratio which equals the period return divided by the period DD.
Investments in CTAs can be subject to substantial charges for management and advisory fees. The % returns in the CTA table above include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.
The regulations of the Commodity Futures Trading Commission (CFTC) require that prospective clients of a CTA receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client's commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the Commodity Trading Advisor (CTA). This document is readily accessible at this site using the Disclosure Document link at the Attain website.
Feature | Week In Review | Chart of the Week | Top 5 CTAs | Top 5 Systems |
Hypothetical Model Accounts using Computer Generated and Actual Client Fills.
| Rank | System Name | 90 Day Return | Return in Dollars | 90 Day Drawdown | DD in Dollars | Min Investment (k) |
| 1 | Omega3 v2 DAX | 67.98% | $13,596.33 | 4.45% | $889.33 | $20 |
| 2 | Bounce ERL | 12.30% | $1,229.76 | 1.48% | $148.18 | $10 |
| 3 | Duna 254 DAX | 112.97% | $28,241.33 | 21.00% | $5,249.50 | $25 |
| 4 | Phi 12/3 DAX | 48.44% | $19,375.76 | 10.09% | $4,034.03 | $40 |
| 5 | AG Mechwarrior ES | 26.95% | $4,042.10 | 21.81% | $3,271.90 | $15 |
Figures listed are as of 10/06/2008.
IMPORTANT RISK DISCLOSURE
The rankings above are the top ranked Trading Systems offered at Attain over the past 90 days using a risk adjusted ratio which equals the period return divided by the period DD.
The % returns in the trading system table above are hypothetical in that they represent returns in a model account. The model account rises or falls by the exact single contract profit and loss achieved by clients trading actual money pursuant to the listed system's trading signals on the appropriate dates, or if no actual client profit or loss available - by the hypothetical single contract profit and loss of trades generated by the system's trading signals over the test period. The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The % returns reflect inclusion of commissions, fees, and the cost of the system. Commission and fee cost = # of monthly trades * $50.00 ($30 for eminis). The monthly cost of the system is subtracted from the net profit/loss prior to calculating the % return. For systems with one time purchase costs, the monthly cost is calculated by dividing the purchase cost by the number of months in the reporting period.
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.
THESE PERFORMANCE TABLES AND RESULTS ARE HYPOTHETICAL IN NATURE AND DO NOT REPRESENT TRADING IN ACTUAL ACCOUNTS.