Market Dynamics and CTA Performance April 2012 Update

We’re always harping on the importance of diversification, and it’s just as beneficial for CTAs as it is for investors. This is why CTAs try to trade markets that are non-correlated – to attempt to reduce risk and volatility. Last year made that task difficult, as we outlined in our 2012 outlook, due to higher-than-usual market correlations and a major surge in risk on/risk off trading. Many CTAs were hoping that 2012 would give them a trading atmosphere better suited for market diversification. How’s that working out?

First, let’s look at one scapegoat for higher correlations: the risk on/risk trading environment. We broke down the risk on/risk off trade earlier this year, when we looked for the average daily move of the “risk on” market grouping between 2000 and 2011 and defined a day as “risk on” when the average gain across all of those markets was over 1%. While 1% may seem somewhat small to be a full bore “risk on” day, that is the average across all those markets, and we found it to be best aligned with the reporting of risk on/risk off days in both the mainstream media and our own commentary. A “risk off” day was the inverse – a day where the risk on market grouping was down over 1%. Using these metrics, the risk on/risk off trade has continued its overall fade, with the vast majority of trading days YTD falling in the “normal category.”

So the risk on/risk off conditions are looking more normal, but what about the overall market correlations? We looked at the average daily correlations across 28 markets for the month of April, and unfortunately, we’re seeing higher correlations as we move further into 2012. The overall correlation in Q1 2012 was 0.264 (using the absolute value of market correlations), but it was higher at the end of the quarter (0.314 for March), and for April the overall average rose further to 0.334.

Click to embiggen.

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

The thing that makes us a little anxious when surveying this data is that the markets seem to be slowly, but surely, starting to move in sync a little more often. This is not what managed futures (or really, any investor) wants to see. With the jobs report today coming in far under consensus, only to be met with jubilation from markets that anticipate the dawn of QE3, it seems to us that things are far more dysfunctional than what the data is telling us. With uncertain waters ahead, all we can say is May the Fourth Be With You

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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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