Volatile Perspectives on Volatility’s Impact on Managed Futures Returns

We can’t blame people for being confused by the narrative out of the managed futures space in 2011. Here was an asset class that had made its name by thriving during volatile times, now struggling in the midst of seemingly high volatility and blaming volatility (of all things) for their poor performance.  A performative contradiction of sorts? Perhaps… but, with the VIX sinking to its lowest levels since August of 2011, and because we’re obstinate and enjoy challenging commonly held beliefs, we decided to take a look at the numbers to find out who was right- those claiming volatility killed the radio star, or those claiming volatility should have been bolstering returns.

To dig a little deeper, we took a look at VIX daily changes back to 2003, and then looked at the average performance of the Newedge CTA index for certain VIX percentage change ‘buckets’. Meaning, how did managed futures perform (on average) during the top 20 daily gains for the VIX, in the worst 20 daily losses for the VIX, and so on for different groupings of percentage gains/losses for the VIX.

The results were initially surprising.  Is that an annualized performance of -60% on the first line for those days when the VIX had the largest spikes upwards? It sure is, calling into question the widely held belief that managed futures are long volatility investments (meaning – they typically perform well in times of increased volatility).

Disclaimer: Past performance is not necessarily indicative of future results.

So what does this mean, exactly? To answer our initial question- those assuming volatility should be an all or nothing game for managed futures- whether as a boon or bane- are all wrong. Is managed futures a long volatility investment? Yes, but that classification should come with a big caveat – because it does not mean that managed futures are going to perform on the day of a spike in volatility. Counter intuitive, yes; but let us explain.

A volatility spike, while signaling a higher volatility environment, is usually an indication of a significant and sudden change in the current market environment. This makes a lot of sense when you think about it. If the VIX moving sharply up represents a spike in fear and uncertainty, it’s likely going hand in hand with a major  trend reversal (from up to down), and when most managed futures programs are classified as trend following, that kind of development is far from desirable. February 2nd of last year was a solid example of this.

What is more interesting to us is that this pattern is mirrored when the VIX decreases. If volatility suddenly contracts, there’s a good chance the move will be accompanied by a reversal elsewhere in the markets as well, and as the data indicates, those kinds of moves can also be detrimental for managed futures. As it turns out – the bulk of managed futures gains (as far as the Newedge index is concerned) came into play when the VIX was making smaller moves  (a sign that the current market atmosphere was being maintained). Bottom line? Managed futures is a long volatility play, but can also be hurt by sharp changes in volatility as they impact the consistency of market trends.

Big Caveat – the VIX is an imperfect measure of volatility as far as managed futures are concerned – because it measures implied volatility in S&P 500 options (in layman’s terms – stock market volatility), while CTAs trade a much more diverse amount of markets than just stocks. In short, this analysis ignores the fact that the VIX could spike while volatility in another market like Coffee or Soybeans could fall on that day. But, in our experience the VIX still provides a good reflection of general volatility as well (per the risk on/risk off mentality).


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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, 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.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website 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.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents 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 composite performance of accounts under the CTA's management over at least the most recent five years. Investor 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.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, 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.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website 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.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents 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 composite performance of accounts under the CTA's management over at least the most recent five years. Investor 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.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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