When markets are highly correlated, it can be tough to stay diversified. If various markets are moving up or down in unison, that can quickly cause your risk and volatility to get out of hand. That’s why we’ve started keeping an eye on two statistics that illustrate how easy or difficult it has been to stay diversified in the futures markets: the risk on/risk off trade, and market correlations.
October turned out to be one of the most “normal” months this year in terms of our count of the risk on/risk off dynamic. (If you need a refresher, we broke down the risk on/risk off trade earlier this year.) The month contained zero “risk on” days and only one “risk off” day. Unfortunately, the lack of big single-day multi-market swings didn’t translate into better CTA performance, showing that while those individual days may hurt, diversification doesn’t help much when the trends are reversing in multiple markets. (Disclaimer: past performance is not necessarily indicative of future results.)
Risk On = average gain of over 1% for “risk” assets; Risk Off = average loss of over -1% for “risk” assets.
What about the overall market correlations? As a refresher, correlation is a statistical measure of how interrelated two sets of data are. A correlation of 1.00 would mean that the markets move in lock-step, and a correlation of -1.00 means that they always move in opposite directions. For diversification value, what we’re looking for is non-correlation (a correlation of 0.00), which would mean that the two markets are behaving as though they are completely unrelated.
The overall market correlation in October was in line with the previous two months, coming in at 0.289 (based on the absolute value of all market correlations). The only significant change from previous months was a slightly higher correlation between metals and energies, as both spent the month on a downward trend. Cotton moved somewhat in line with stocks (and opposite treasuries) for the second month in a row, showing more susceptitilibyt to overall market trends than other softs. As usual, the Japanese Yen and natural gas stood out within their respective market sectors as excellent diversification plays.
Click to embiggen.
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.