Category: Managed Futures
Managed Futures Cannot Find Returns on Market Reversals
Managed futures declined on market reveals from the Fed FOMC announcement of a 25 bps rate hike. While the move seemed to have been baked into market thinking before the announcement, key asset classes revised trend direction after the 15th. The SPX, which was already flattening in trend, turned lower. Bond returns, (long duration), actually turned higher on a perceived more aggressive Fed. The dollar strength reversed and commodities moved higher after declining for the last month. You get the picture on the change. Trend-followers saw a reversal in performance which added to a lower overall return.
Managed Futures Show Strong Performance with Financial Trends
Managed futures strategies generally showed performance gains in February based on strong equity market return trends and the the positive gains in fixed income markets. The dollar also started to again trend up while commodities markets were more mixed. It is notable that there was a strong gap between traditional trend-followers and short-term traders whose index was down almost 2% for the month.
Managed Futures – No Trends to Exploit
The managed futures hedge fund style, as measured by the SocGen CTA index, declined by just under one percent for the month. There was limited movement in commodities and bonds and the largest gains for the month were in non-US equities where there is usually less exposure by futures managers. Going back over our sector trend measures, we were predicting a lackluster month since there were few strong directional trends going into January. The SocGen trend indicator index was down over 6 percent and the short-term trader index declined about 4 percent.
To Adjust or Not Adjust Volatility for Momentum Strategies
Risk management has taken the money management business by storm. If you run money, you have to say that you control volatility and manage the risk. It is the equivalent of saying, “I love my mother and apple pie.” If risk goes up, you have to cut position exposure or at least that is what many will say is the path to good returns. Nevertheless, the empirical testing of this truism could be improved. A recent paper in the Journal of Alternative Investments called, “Volatility Weighting Applied to Momentum Strategies” looks at this important question in detail and concludes that it does help at improving the return to risk.
Bond-Stock Correlation Should Be Driver of Managed Futures Decision
Why should I hold managed futures? This was a much harder question to answer when bonds had such a negative correlation with stocks. Bond provided safety, yield, and return. Allocations to bonds provided diversification and return during the post-Great Financial Crisis period. It protected portfolios when volatility spiked, generated returns during the falling inflation, and […]
Managed Futures – Should we be Disappointed?
Managed futures, as measured by the SocGen index, finished negative for the year. Many would have thought this was an odd 12-month return performance given the events of the year. Let’s list some of the big moves: the large equity decline in the first quarter, the equity gains in the fourth quarter, the bond gains and subsequent fall through the year, the dollar move higher, the BREXIT event, the US presidential election, and the comeback in oil to name a few. We could go on with some of the minor markets, but the overall conclusion is that there were trends and there were some large moves.
CTAs – What is going on with size?
CTA Intelligence reported the top 50 CTA’s as of September 2016 and provided some good graphics on the names and the changes over the last year. Taking a closer look at the data from the perspective of market structure and industrial organization provides some additional insights on the managed futures industry. We will focus the discussion on the top 50 managers because these are the ones that will receive the most interest from institutional investors. We can call this the relevant market.
Risk Hurdles
Risk management is more than applying quantitative tools to measure things like volatility or skew. It is an operational management problem of gathering and reporting data. The quality of risk management is related to the ability of a manager to properly aggregate data for analysis. Hence, strategies that have greater operational problems at gathering information on risk will have higher risk.
Current Trends
Each month we run a set of trend models against the major markets in each asset class sector. We then average the trend direction, either up or down, to generate a sector signal.
October 2016 Managed Futures Performance
Managed futures should not be synonymous with trend following but most of the major indices that track this hedge fund style have a high proportion of trend-followers.
Managed Futures Performance
Managed futures shows good long-term performance versus equities. Yes? No? If you start investing in the SocGen CTA index in 2000 and compare with any end year until 2015, you will shows positive returns as a stand-alone investment.
Limited Major Trends, but Some Selected Opportunities in Commodities
Each month we look at the major trends in market sectors to determine the current macro signals within prices and the effectiveness of trend following. Last month, our view was that monetary policy uncertainty left the markets with few clear trends. October looks like a potentially good market in the fixed income, rates, and commodities. The best market potential for October as of the start of the month is in base metals and the energy complex. Nevertheless, the trend signals in base metals are significantly at odds with bond signals and with the talking head stories that global growth will continue to be modest. Maximum opportunity and risk occur when trends are at odds with general market commentary or conventional wisdom. The energy complex is trending higher on OPEC news, but the ability for these trends to last will be subject to OPEC members holding to some production limits.
Managed Futures – A Month of Giveback
The performance of the SocGen Managed futures index fell short this month relative to major asset classes except for the long bond. Its year to date performance is now below all of the major asset classes. While many traditional long-only traders were able to take advantage of the risk-on environment, managed futures was not able to exploit opportunities surrounding the Fed announcement.