September came and went with a relative whimper. It was our view that various key macro events scheduled throughout the month coupled with uncertainty over monetary policy, had the potential to produce significant moves across global markets. As it turned out..with the exception of the commodities sector…this was not the case. U.S. equities ended the month flat (+0.02%), however turned in a good quarter with the S&P 500 returning 3.8%, bringing gains for the year to a +7.8%.
Once again with all eyes and ears tuned to central banks..policy uncertainty had a virtual choke hold on markets, and as a result global trends were virtually non-existent for CTAs…particularly in the financial sectors. The performance of managed futures fell short for the month with the Soc Gen CTA Index falling 1.2% to end the quarter down 3%..virtually erasing all of 2016’s gains. For the year, the CTA Index is still up 0.9%.
For trend-followers, portfolio exposure levels were relatively modest coming into September and had been falling since July, following the Brexit pop and an August performance pullback. Managers continued to decrease long bond exposure in August and September, and as a result trend-followers are taking less directional exposure in the fixed income sector. Naturally the relative “trendiness” of global futures markets will ebb and flow as if in a random cycle, with periods of strong trends typically followed by periods of poor trends..as was the case from Q2 to Q3.
CTAs and trend-followers in particular, often take criticism for their tendency to give back a portion of their profits during trend reversals. As we know from experience, the tendency for trend-followers to return a portion of profits following a period of strong “trendiness”, and as trends become exhausted..is implicitly part of the strategy of trend-following.
Short-term managers struggled throughout the quarter with the Soc Gen Short-Term Traders Index losing nearly 5%, following a -1.9% loss in Sept. For the year, short-term is still slightly positive, returning +0.6%. August was particularly troublesome for short-term volatility breakout strategies. Volatility compression and the tightening of trading ranges in stock indices, currencies, and bonds, followed by volatility expansion..was then immediately followed by another bout of compression..is just about the worst case scenario for short-term systems. Those managers with quicker reactions to changes in price and volatility tended to struggle more.
The CBOE Volatility Index remained range bound at low levels throughout the quarter. A 2.5% decline in the S&P 500 on Sept. 9th coupled with a brief pop in the VIX was followed up with a series of moderate up and down moves in the S&P 500 for the remainder of the month. Option based managers managed to turn the low-vol. lemons into lemonade and profit from this choppy range-bound action, generating solid returns during the month.
In commodity trading, trend-following gains were led by energy and metals. Energy prices rallied after OPEC, the group of oil-producing nations, agreed to reduce oil production for the first time since 2008, boosting prices. The S&P GSCI rallied 4.1% in Sept. bringing yearly gains to +5.3% while the S&P GSCI Energy increased 6.1% and 8.6% YTD. Sugar prices gained 11.3% in Sept. and +44.7 YTD.
image via flickr