Positive start to the new year, with all of the major averages now above their 200 dma's. The NASDAQ-100 rallied 3.44% this past week, boosting the <b>NQ Timer</b> return to <b>16.26%</b> since 07-OCT-2010 inception date. - G
The Technical Indicator: U.S. markets extend the 2012 uptrend CINCINNATI (MarketWatch) â After breaking out to start the year, the major U.S. benchmarks continue to press higher. http://www.marketwatch.com/story/us-markets-extend-the-2012-uptrend-2012-01-10-1110520 In the process, each index has edged atop well-defined resistance, likely confirming the 2012 uptrend. The S&P 500âs hourly chart highlights the past three weeks. As detailed previously, the S&P is rising from a bullish ascending triangle, setting the stage for Tuesdayâs strong start. From current levels, initial resistance holds at 1,284, and is followed by its five-month high, the October peak, of 1,292. Meanwhile, the Dow industrialsâ near-term backdrop is similar. In its case, the blue-chip benchmark has established a one-week pennant defined by the converging trendlines. The pennant is a continuation pattern that conventionally breaks with the prevailing trend, and in this case, the pattern points to an eventual break higher. And the Nasdaq Compositeâs near-term price action is less orderly, though still constructive. To start, the index has sustained a break atop its 200-day moving average across three straight sessions. Meanwhile, itâs also edged atop the December peak of 2,674, notching a âhigher highâ better illustrated on the daily chart. Widening the view to six months adds perspective. On this wider view, the Nasdaq has cleared its 200-day moving average, also notching a âhigher highâ vs. the December peak. Both events signal a bullish trend shift. On further strength, next resistance holds at the mid-November peak of 2,695, and is followed by the November peak of 2,730. Moving to the Dow, its six-month backdrop remains stronger. The blue-chip benchmark has sustained a break to five-month highs. Looking ahead, initial resistance holds at the January peak of 12,479 and is followed by additional overhead at the June high of 12,570. And the S&P 500 has also sustained the 2012 breakout. With Tuesdayâs strong start, the index is challenging significant resistance at 1,292 matching a five-month high. On a breakout, modest overhead holds at 1,305 and is followed by more significant resistance spanning from 1,316 to 1,320. (The 1,316 area roughly matches the ascending trendline from the October peak.) The bigger picture With Tuesdayâs strong start, the S&P 500 and the Dow industrials are challenging well-defined resistance. Starting with the Dow, notable resistance holds at the January peak of 12,479. The index has edged atop this level in Tuesdayâs early action, and a sustained breakout would confirm its uptrend. And as always, the breakout point â Dow 12,479 â would revert to first support. Meanwhile, the S&P 500âs near-term inflection point holds at 1,284. Here again, the S&P has cleared resistance in Tuesdayâs early action, and the breakout point â S&P 1,284 â now marks first support. So collectively, the near-term question is whether the S&P and the Dow can sustain breaks from well-defined resistance. If so, the 2012 trend shift has been confirmed. And widening the view to six months, the SPDR Trust S&P 500âs backdrop had already strengthened leading in to this week. As detailed previously, significant support rests at its five-month trendline (in orange), and the 200-day moving average (in blue). This area also matches the 2010 and 2011 closes of S&P 1,257. Against this backdrop, market bulls are on offense above trendline support, and the S&Pâs path of least resistance points higher barring a violation of S&P 1,257.
The Technical Indicator: S&P, Dow rattle cage on five-month highs CINCINNATI (MarketWatch) â Market bulls remain on offense with this weekâs strong start. http://www.marketwatch.com/story/sp-dow-rattle-cage-on-five-month-highs-2012-01-17-1136190 Most notably, the Standard & Poorâs 500 Index and the Dow industrials have both touched five-month highs, and a close at current levels would confirm the market recovery attempt. The S&P 500âs hourly chart details the past three weeks. The S&P has absorbed the âEuropean-debt downgradeâ plunge. From current levels, initial resistance holds at the January peak of 1,296, and is followed by additional overhead at 1,305, matching the mid-July closing low. Meanwhile, the Dow industrialsâ near-term backdrop is similar. In its case, first resistance holds around 12,480, and is followed by the January peak of 12,514. Conversely, first support rests at 12,400, while a deeper floor holds at last weekâs low of 12,311. And the Nasdaq Compositeâs near-term pullbacks remain shallow and short-lived. With Tuesdayâs strong start, initial resistance spans from 2,726 to 2,730, matching the November peak. Widening the view to six months adds perspective. On this wider view, the Nasdaq has cleared a five-month downtrend and the December peak. As detailed previously, next resistance holds at the November high of 2,730, and is followed by significant overhead at the October peak of 2,753. Moving to the Dow, it continues to outpace the broader markets. Looking ahead, its first significant support rests at its breakout point, spanning from 12,283 to 12,291. Conversely, next resistance holds at the June peak of 12,570, and is followed by major overhead at 12,750, matching the pre-crash high. And the S&P 500 is challenging significant resistance at the October peak. Its persistence at resistance is constructive, improving the chances of a sustained breakout. (The S&P is trading around the 1,300 mark as this is written.) The bigger picture As detailed above, market bulls remain on offense with this weekâs strong start. Consider the following: * The Dow industrials have extended to a five-month high in Tuesdayâs early action. * The S&P 500 has also touched five-month highs. * The Nasdaq Composite has risen within view of significant resistance at the October peak of 2,753 â a break from this area would mark a five-month high. So by definition, the S&P and the Dow have both notched a âhigher highâ and a close at current levels would confirm the current uptrend. Against this backdrop, the market technicals remain straightforward. S&P 500 resistance To start, next resistance spans from S&P 1,316 to 1,320, matching the trendline from the October peak. Consider that the August crash accelerated with a trendline violation, and the failure at the October peak triggered another steep downdraft. More plainly, the response to this area is worth tracking. S&P 500 support Conversely, two significant support points stand out: * First support now spans from S&P 1,292 to 1,296 matching the October peak and last weekâs high. A sustained break from this band confirms the market recovery attempt. * A deeper, and more important, floor holds at S&P 1,257 matching the 200-day moving average, as well as the 2010 and 2011 closing levels. Summing up the backdrop All told, the technical backdrop remains constructive. Consider that each major U.S. benchmark is touching new highs, and more notably, has rallied on bad news. While the markets are near-term extended â and due to consolidate â the S&Pâs longer-term path of least resistance points higher barring a violation of the 1,257 support. - G
France signals slow death of sovereign debt market Commentary: Investors will seek other safe havens LONDON (MarketWatch) â So where was the carnage? http://www.marketwatch.com/story/france-signals-slow-death-of-sovereign-debt-market-2012-01-18 Late last Friday night, the ratings agency Standard & Poorâs delivered its downgrade of French debt, stripping one of the worldâs biggest economies of its AAA rating. Over the weekend, it wasnât hard to imagine the cataclysm that would follow. After all, the news could hardly be more worrying. The French debt market is one of the largest in the world â with $1.6 trillion of debt outstanding, France is the worldâs fourth-largest sovereign borrower. With its AAA rating gone, all the schemes for rescuing the euro lay in tatters: they all depended on leveraging up the credit-worthy members of the euro to help the peripheral nations, but Germany is now the only major country with a AAA rating, and canât be expected to bail the whole continent out. The single currency may now be unsalvageable. Worse, Nicolas Sarkozyâs campaign for re-election as president now looks hopeless. He pledged himself to maintaining the AAA rating, arguing that it was a matter of national prestige, but failed in that as so much else. He will be replaced either by Francois Hollande, an old-fashioned âborrow-and-spendâ socialist who has been making campaign promises as if austerity had never been invented. Or else by the far-right Marine Le Pen, who has promised to restore the franc, a move that would provoke an immediate financial crisis and a run on the French banking system. There wasnât any other way to spin it. The downgrade looked like a disaster. But in fact, there was very little reaction. The euro wobbled a touch. The CAC-40 dropped a few points, then recovered. Yields on French debt nudged up a touch, but no more than they might on a normal dayâs trading. Why wasnât it worse? In reality, ratings downgrades are losing their power to shock us. It is a bit like watching Friday the 13th Part 27. Once you seen a couple of teenagers get gorily dismembered, the next few donât seem very surprising. What the French downgrade really signaled was the slow death of the sovereign bond market â and each chapter in that saga is a bit less surprising. Japanâs AAA rating is gone. So is the U.S.âs. Italyâs went a long time ago, and now Franceâs. The U.K. canât be far behind. Neither can Germany. The markets are gradually getting used to the idea that sovereign debt is not safe at all. None of the top five sovereign borrowers â the U.S., Japan, Italy, France and China â are AAA rated anymore. All of them are still running big budget deficits, and show little sign of bringing them seriously under control. If these debts are ever going to get repaid, not only do the deficits have to stop, governments actually have to run surpluses for many years. There is about as much chance of Angela Merkel buying a holiday home in Kos as that happening any time soon. Only two things can happen from here. Either governments are going to default outright. Or they are going inflate away their debts, using compliant central banks to keep interest rates significantly below rising prices for many years. Either way, everyone is going to lose a lot of money. Whether it is through a default or inflation doesnât make much difference in the medium term. There are already signs that investors are starting to realize that. Sovereign debt used to be regarded as an absolutely safe asset, holding the same place in the financial system that gold once did. What the French downgrade tells us is that that is no longer true. Over time, investors are going to rebalance their portfolios completely to take account of that. That will lead to two big changes. First, governments will have to pay a lot more to borrow. Itâs already happening. Italy has to pay almost 7% to borrow 10-year money. France has to pay more than 3%. Germany, Japan, and the U.S. can still borrow money at near record low rates. But that is not going to last forever. What we are watching is a bubble bursting in slow-motion. It will move from country to country. The euro zone may be the first in the firing line, but it wonât be the last, nor will it be restricted to Europe. By 2020, interest rates of 7% or more will be common for all the developed countries. The era of cheap government borrowing will slowly come to an end. Second, money will flow into new safe assets. What will those be? A mixture of emerging market debt, gold, corporate bonds and blue-chip equities. The switch from the developed world to the emerging markets is already well underway. Whilst developed world ratings are being cut, in other markets they are going in the other direction. Since 2002, Italy has lost five rating notches, and Spain four. Russia is up three and Turkey is up four. It isnât hard to work out which is the better bet. Likewise, gold is reasserting itself. Central banks are stockpiling the precious metal again. In 2011 they were buying in record quantities, with countries such as Russia and Thailand leading the way. When interest rates are as close to zero as makes no difference, and central banks are printing money, the precious metal will always reassert itself as the ultimate store of value. Finally, corporate bonds and blue-chip equities are naturally going to suffer in a recession, but once growth resumes will reassert themselves. They grow at least as fast as the economy, and they pay a regular income. France reminded us that the sovereign debt market is now in long-term decline. The most important move for investors will be to make sure they get on the right side of that trade â and that means getting out of all developed world government debt, and into the new safe assets. - G
My futures trading system now has a 19.74% gain since inception. This long-term trend-following approach weathered a difficult year in 2011, as did most all program - Managed Futures 2011 Performance: Strategy Breakdown December 20, 2011 http://www.attaincapital.com/altern...s-newsletter/investment_research_analysis/455 As 2011 draws to a close and everyone begins to reflect over the happenings of the past year, those with money âat workâ usually become particularly pensive. Could I have done better? Could I have done worse? Does my portfolio need adjusting? The self-examination process this year is perhaps even more strenuous than usual. With managed futures set to round out the year with losses overall, those invested in CTAs may have more questions than usual as they look at what worked (if anything), and what didnât amongst the managed futures programs they follow. These are loaded questions- especially in the chaos that has been 2011- so we took some extra time to make sure the perspective here was what we needed. Plus, there will be no newsletter the next two weeks with our offices closed Mon. the 26th and Mon. the 2nd. We typically end the year by breaking down how individual programs had performed throughout the year, but usually end up repeating ourselves quite a bit through that process (i.e. this program, like the rest of the trend followers, did xyz because of the same market environment). To avoid this repetition, we instead looked this year to break down managed futures performance by strategy type. The difficulty in this kind of analysis is establishing what categories are most appropriate to use. There are a wide variety of factors that can differentiate one program from another. That being said, in our analysis of a wide universe of managed futures programs, we found a series of elements that created unique enough distinctions to warrant specific categories, including trading framework, unique trading structures, and selected market exposure. The breakdown looked a little like this: Now, the minute anyone suggests a system of program categorization, the knee jerk response of an industry participant is to pull out the trump card: What about such and such a program? They have discretionary trading AND spread trading worked into their program- what category are THEY in? Typically, this is a cause for headaches- especially for those running or compiling a database. To avoid the sticky wicket of cross-category considerations, we ask ourselves one simple question- which unique component of the strategy most represents the diversity it stands to offer? For instance, the Rosetta program- an agricultural trading program that utilizes spreads and fundamental indicators- could theoretically be placed in three separate categories (discretionary, ag trader, or spreads), but it is their concentration in the agricultural space that facilitates their ability to analyze the fundamentals and select the proper spreads. Their edge (as we understand it) is their focus and experience in the agricultural space, not some dynamic surrounding spreads â so, they get the nod to the ag category, and so on. Now that we've taken a nose dive into the world of cliches, and before we delve into the real meat of this piece, it may be worthwhile to take a look at the 20,000 foot view of the asset class first. The various managed futures indices have the asset classes year to date performance ranging between -3% and -5% for the year. While these indices are an imperfect proxy for managed futures as a whole given the various biases inherent in all indices, and while past performance is not necessarily indicative of future results, 2011 provides an excellent opportunity to spotlight how various kinds of programs should, and often do, perform. Here, we spell out what certain categories mean, which CTAs within those categories were noteworthy this year, how the strategies reacted to the circumstances they face, what the overall performance of the category was like, and other pieces of content related to these strategies that may be of interest to you.
TRADING FRAMEWORK Defined here as the explicit definition of a program based on performance drivers, trading signals and model diversity, the trading framework of the following strategies are responsible for the direction and momentum of their performance. Category: Multi-market Systematic traders How it works: When you think of traditional trend following strategies and bellwether names like Winton Capital, John W. Henry and so forth, this is who you're thinking of. The type of strategy that brought managed futures to fame, multi-market systematic programs attempt to identify and latch on to longer and medium term trends in market prices in an effort to capitalize on the shift taking place. Different trend followers will identify these trends in different manners, and as a result, different programs will have drastically different risk levels, minimum investment requirements and performance from one another. While trend following, and multi-market systematic traders in general, are typically framed as the least risky of the managed futures strategies (which doesn't mean they don't present a risk of losses, because they definitely do), the infuriating part of investing in a multi-market systematic program can be the time between a trend hitting its peak and when the program will get out of the trade, as the risk management parameters on most of these programs will force them to give up some of their gains as they ensure the trend is actually caput. These strategies typically are long volatility programs, meaning they take small but frequent losing trades in exchange for the chance of rare but large outlier winning trades when volatility expands in a market they are following. Being long volatility programs, they typically struggle when volatility is contracting across the markets in their portfolios (like 2009). (Attain draws a distinction between traditional, longer-term trend followers and short-term systematic traders- but we'll cover them in a moment. 2011 Programs of Note: Clarke Capital Worldwide, Covenant Capital Aggressive The Breakdown: After closing out 2010 with programs like Clarke Capital Worldwide and Covenant Capital Management sitting on new equity highs, and most programs needing global markets to continue to head higher to make winners out of existing positions, we expected that there would be some type of pull back for this strategy type in 2011. That doesn't mean we were looking forward to it. Trend followers typically spend much more time in drawdown than at new equity highs- particularly when they're operating on a longer-term timeframe, yet it is never easy when in those drawdowns. The first two months of the year set the tone for the remainder of 2011, with a weakening dollar causing January gains to be decimated throughout February. That kind of month-by-month movement became the painful reality facing many a trend following investor, with positions put on during a move in one month stopped out in the following month as markets retraced their move. There was a moment heading into the fall where we thought a nice performance bounce might be possible for multi-market systematic traders as new down trends had emerged, and it appeared as though CTAs were on the right (short) side of trades. Cue Columbus Day's market reversals and a month of October which saw up moves in 9 out of 10 markets in 9 out of every 10 days, and those short positions were all of a sudden being stopped out for losses, crushing the hopes of a strong 2nd half for this strategy type and pushing programs like Clarke Capital Worldwide into drawdowns. Again, we find ourselves looking at how the market environment impacted this strategy as a whole. Multi-market systematic traders are looking for that sustained trend- waiting much longer than their short-term systematic counterparts to enter the trade and even longer to get out. As such, it's not surprise that, as this unique 2011 (up,down,up,down) volatility in the markets made trends beyond the day nearly impossible to ascertain, programs embracing this type of strategy struggled. And yet, there's more to learn from this strategy's performance over the course of 2011. As we recently covered on the blog, the markets seem to finally be turning to a more sustained, downward trend, and these same programs that floundered in the volatility of August and October are now benefiting from the sell-off in grains and the move higher in bonds, helping other trend following programs. Now, if we can only see a few months of such trends in the same direction- those outlier trades multi-market systematic programs are famous for should return. General Performance: Poor Category: Short-term Systematic traders How it works: The cousin to the multi-market systematic trader, the short-term systematic program will also look to latch onto a âtrendâ in an effort to make a profit. The difference here has to do with timeframe, and how that impacts their trend identification, length of trade, and performance during volatile times. Unlike longer-term trend followers, short-term systematic traders may believe an hours long move to represent a trend, allowing them to take advantage of market moves that are much shorter in duration. One manâs noise is anotherâs treasure in the minds of short term traders. This, theoretically, gives them an edge over traditional programs which must see an extended move in order to turn a profit, as the short term traders can theoretically capitalize on rapid bursts of movement within a choppy move. But there is never a guarantee that the program will be in sync with the jumps taking place, and as is the case with most strategies, timing really is everything here. 2011 Programs of Note: Dominion Capital Management Sapphire, Bouchard Capital, LLC Short Term Multi Commodity The Breakdown: Short-Term Systematic traders were amongst the biggest disappointments for managed futures investors in 2011. Short-term systematic traders are often included in a portfolio because they typically zig when more traditional managed futures strategies (trend followers) zag. However, that was not the case this year, with both Dominion and Bouchard hitting new max drawdowns in October right alongside a good amount of the multi-market systematic traders. The funny thing is, 2011 had started well for both programs- with Dominion up +4.90% for the year by the end of July, and Bouchard sitting on new equity highs at the end of June. Then came the volatility surges during the summer. Now, typically, rising volatility is a good thing for short-term traders, so seeing losses in this strategy category may seem to fly in the face of conventional wisdom. A closer look at the processes involved with these programs, however, paints a very different story. Was there volatility? Absolutely- but the distinction here is that volatility was choppy, with major intraday swings that often resulted in short-term systematic traders getting stopped out (think, up 2% Monday, down -3% Tuesday, back up 1.5% on Wednesday). The majority of short term strategies weâre describing are indeed short term, not needing weeks long moves to make money, but with average hold times of two to five days, they still do need some sort of "follow through" into the next trading day after entry. When the market volatility eliminates this follow through (with one dayâs move being completely re-traced the next day), stops don't get a chance to kick in and the programs continue to operate at elevated levels of risk. The latter scenario is the one that played itself out repeatedly for Dominion and Bouchard in the second half of 2011. There are two pieces of good news here. For investors in Dominion and Bouchard, there's the peace of mind with knowing that both programs have perked up a bit in December, and are demonstrating the ability to take advantage of short trends in the market. For managed futures investors in general, it's yet another example of a specific type of strategy behaving the way we would expect it to when faced with a specific set of circumstances. The question now â will markets continue to have amnesia from one day to the next depending on the rumor of the moment out of Europe, or will volatility return to its more normal 2-3 day profile? General Performance: Below Average
Category: Multi-Strategy traders How it works: These strategies generally take the trend following concept and wrap it with other lowly correlated strategies, relying on alterations to the basic trend following infrastructure in terms of timeframe, direction and risk management components. They may also add mean reverting strategies, spreads, and fundamental models to their systematic core. The appeal of such a strategy is that it, in some ways, is like investing in a mini-managed futures portfolio. The risk is that managers will push the bounds of diversification in a cautionary tale of too-much-of-a-good-thing. As they take on more non-correlated models and positions, they also take on the possibility of the point of diminishing returns and the risk of those periods where noncorrelation shows up in the short term as performance in the same direction. 2011 Programs of Note: 2100 Xenon Managed Futures 2X, Welton Investment Corporation The Breakdown: Much like traditional trend following strategies that have had an up and down year, multi-strategy programs have been hurt by the market whipsaw of risk on / risk off as well. However, the losses suffered by these programs were generally less than the losses suffered by traditional multi-market systematic programs (aka - trend followers), as mean reversion, fundamental overlays, and shorter term models picked up some of the slack. Other multi-strategy programs, like 2100 Xenon Managed Futures 2x, incorporated levels of yield curve strategies that capitalized on the skyward bound trends in U.S. treasuries. Others, such as Welton Investment Corporation with losses in November totaling -14.80%, struggled to separate themselves from programs operating a single strategy. In the end, most all multi-strategy programs are still primarily trend followers at heart. Therefore, while we expect them to be less volatile, it is unrealistic to think that this strategy type will make money when trend followers are mostly down for the year. General Performance: Average Category: Discretionary traders How it works: All CTAs are discretionary in so far as they are hired to manage an account, and in so doing are given discretion over that account, to place trades as they see fit. However, whenever you read the term discretionary trader, and our meaning of discretionary trader for the purposes of this newsletter, it means something different than someone who manages accounts. In this context, a discretionary trader is a CTA that does not follow a systematic model. They may still use technical indicators to advise their trading, and they may incorporate their own fundamental and macro analysis into the decision making process, but at the end of the day, it's the trader making the call- not an algorithm. 2011 Programs of Note: Dighton Capital, Mesirow Financial Commodities Absolute Return Strategy The Breakdown: A volatile trading climate may have seemed like a dream come true for a seasoned discretionary trader. In a world where systematic approaches could not anticipate the irrational behavior of the markets and wild headline reacting swings, many hoped that discretionary trader's ability to guide trades through the thicket of global events would bring them out on top. Alas, it was not to be. Whether it was Mesirow keeping to the shallow end by essentially taking on no risk, or Dighton going beyond the deep end with extreme risk, the volatility pushed many of the discretionary programs we track into a year of losses. The most notable of these losses was seen by Dighton Capital. In the end, Dighton followed their usual discretionary trading pattern of taking a contrarian stance against an outlier move â and adding to the position as the trade went against them. But unlike their past successes with this strategy, this outlier simply didnât revert to the mean. It kept going and going, past all time highs, past resistance, through central bank intervention â and more- ultimately culminating in losses of -70% plus. The blow up became the poster child for the risk involved in investing in a discretionary trader. The trade was extremely well rationalized by the managers, and had Dighton been able to hold out just a little bit longer, those trades would have become immensely profitable. Unfortunately, when the markets can stay irrational longer than you can remain solvent, it doesn't matter how right you are- you have to have timing on your side as well. General Performance: Poor
UNIQUE TRADING STRUCTURE While trading philosophies and market selection may seem like the key elements up for consideration when categorizing strategies, it is sometimes the structures of the trades placed within the program that truly make it stand out from the crowd.The categories listed here find their performance explicitly tied to the structure of trade they embraced. Category: Spread traders How it works: Spread Trading is the simultaneous purchase and sale of something very similar, economically speaking. In commodity markets, that usually means buying one contract month of a market while selling another contract month of the same market. For example, buying July 2011 Corn futures and selling December 2011 Corn futures is a spread trade. Depending on whether you buy or sell the spread - the goal of a spread trade is for the difference between the two sides of the trade to either get further apart or closer together. In our example above, you would want either July Corn rising faster than December Corn does, or December Corn falling faster than July Corn. This example represents what is called a "calendar spread," but there are many more spread trade categories that managers will use. One of the biggest appeals of spread trading is that it can reduce risk, with the potential for losses on one side of a spread trade to be hedged by gains on the other side. Another benefit is that the margins for holding a spread trade are usually much less than the margin required for putting on an outright position (because of the offsetting positions). That being said, this doesn't mean that spreads have no risk - the two sides of the trade can and will go in completely opposite directions from time to time, which can cause substantial losses. Overall, spread trading is one of the truly unique investment strategies to managed futures (you canât buy July IBM and sell December IBM, for example), providing a level of diversification even traditional non correlated strategies such as trend following can not due to spread traders reliance on the relationship between two different versions of the same instrument, not the directional movement of that instrument. 2011 Programs of Note: Emil Van Essen The Breakdown: While many multi-strategy programs are venturing into the world of spreads to help hedge their risks in various markets, no manager, in our experience, has done as good a job as Emil Van Essen in crafting a unique spread trading strategy, once again putting in a strong year of performance. This program has seen most of its success in trading energy spreads by positioning themselves to take advantage of the continued contango conditions in those markets and the roll yield available (shorting a negative roll yield results in a gain) due to that fact. The addition of yield curve exposure and- most recently- intra-market spreads- trading similar contracts instead of just the same contract in different months as they do in a calendar spread, further diversified the program while remaining in the spread realm. General Performance: Good Category: Options traders How it works: There are two types of options (puts and calls), and there are two things you can do with each (purchase or sell/write). For the sake of clarity, let's look at puts. Think about a put as a life insurance policy- where small amounts are paid on a regular basis in order to ensure coverage in the event of a crisis. Using this analogy, put option buyers are just like life insurance buyers. They are willing to put up a small amount of money in order to receive a large sum if they die. On the other side, the put option seller is just like the insurance company. They will take your small amount of money, and in return promise to pay you a large sum if you die. In practice, the sellers are betting that the price action will not move a certain amount, in a certain direction, before a certain date (i.e. the "person" that was insured will be alive and well after this year ends). If the market moves that certain amount, in a certain direction, by a certain date - then the buyers will make out; if it doesn't - then the sellers will keep the premium the buyer paid. You may have noticed the string of qualifiers in the example above, saying the price had to move a certain amount, in a certain direction, by a certain date. These three qualifiers are really what makes options trading difficult. You must be right on all three accounts, not merely one as you would when buying a stock (direction). As the saying goes, almost only counts in horseshoes and hand grenades. Most option trading managed futures programs are option sellers, collecting premium in one manner or another. This give them a short volatility profile, where frequent small gains are interrupted by infrequent, but large losses when volatility spikes. 2011 Programs of Note: FCI OSS, White River Group Diversified Option Writing, LJM Partners LTD Neutral S&P Option Premium, Bluenose Capital Management LLC BNC EI The Breakdown: The first half of 2011 was an option sellers dream come true, with elevated market volatility making it seem easy for option sellers who were selling options at elevated premiums while the markets stayed safely away from penetrating strikes. FCI OSS, for instance, reeled off seven profitable months to start the year, taking in premium while selling puts and calls in markets like Coffee, Corn, Crude Oil, Gold, Euro Currency, Heating Oil, and RBOB Gasoline. By the end of July, the FCI OSS program was close to making new equity highs for the first time since June 2010. These hopes came to a crashing halt in the first week of August, as the S&P downgrade of the U.S. caused volatility to spike across all markets. FCI, in particular, fell afoul of the market on multiple fronts and in both directions. Short calls in Bonds and Gold and short Puts in Crude saw the markets move in the worst possible direction. The end result? Painful losses upwards of -50%. The more conservative FCI CPP program, another short volatility program âyet a hedged one, was able to hold losses to -15.61% for the month of August, largely as a result of the hedges they had in place headed into the storm. While FCI was the most publicly recognized crash and burn for option sellers in August, there are a few important things to note. For one, FCI was not the only program to experience pain in August. Most option sellers found themselves saddled by losses as a result of the volatility, including LJM Partners and White River, showing that this is the risk you run when investing in an option seller. You may see steady gains for an extended period of time, but it takes one bout of intense volatility in the wrong direction to wipe out all of those gains- and then some- making it critical that investors take steps to protect their option selling gains. The one bright spot amongst option programs- Bluenose Capital Ma nagement, which despite losses alongside the rest in August managed to cap those losses due to its trade structure and finish the year in positive territory. Is this the option seller investors have been waiting for who can successfully navigate volatility spikes? Or a case of being fooled by randomness⦠Time will tell. General Performance: Poor
MARKET EXPOSURE On occasion, a program's decision to focus exclusively on a given sector or market will create a trading dynamic so unique that it defines not only performance, but the manager's perspective on program cultivation as a whole. We therefore find our final grouping of strategy categories driven by deliberate selection of markets and sectors. Category: Agricultural traders How it works: Relying on what has been the backbone of the futures industry since inception, agricultural traders are exactly what they sound like- traders that specialize in the trade of agricultural commodity futures contracts (think Corn, Wheat, Soybeans, Hogs, Lumber, and so on). Their methodology of trading can vary substantially, from the 100% discretionary traders to those that are partially systematic in nature, but most have a background in Chicagoâs famed trading pits and utilize some form of fundamental data such as how much acreage has been planted in such and such crop, or what the weather in Brazil is looking like next month. Many argue that sectors like grains and softs are more susceptible to fundamentally guided shifts (spurred by things like USDA reports) than other markets are, requiring agricultural traders to exercise their experience and discretion in light of events that quantitative models may not be able to identify or predict. 2011 Programs of Note: Global Ag, Rosetta Capital Management LLC â Rosetta Program, NDX Shadrach, NDX Abedengo The Breakdown: Agriculture traders had an up and down year, with Rosetta Program, Global Ag, and the NDX Shadrach and Abedengo strategies starting the year off hot in the first quarter before cooling off over the summer. Ag traders we speak to regularly discussed how the market seemed to be trading less & less on supply and demand fundamentals, instead choosing to focus on the economic climate seen here and abroad. The end result for the Ag traders we track was a range between breakeven and up slightly on the year in performance thus far. Overall, these programs have held their own despite the challenges of a marketplace that refuses to trade on its own fundamentals and technical indicators. That being said, October witnessed a return, albiet temporary to these very same fundamentals, opening the door to hope moving into 2012. General Performance: Average Category: Currency traders How it works: You will often find us slamming forex trading on our blog. The forex market is murky, complicated and difficult to navigate, which is why it is exceedingly rare for us to find a manager in the space with whom we are comfortable. That being said, with the right risk management procedures in place, currency traders can experience great success. As is the case with many strategy types, it's a matter of timing and circumstance, but with the volatility we've seen in forex markets since 2008, this is certainly a category that is not for the faint of heart. 2011 Programs of Note: P/E Investments The Breakdown: Between debt ceilings and governments competing for the coveted position of "not-as-screwed-as-the-other-guy" via currency wars, the forex markets were hot and hectic this year. As futures investors, the constant foray into the markets by governments can become maddening as trends that were once present flip on a dime only to flip back a short time later when the spigot is turned off. Thus, finding high quality systematic currency traders has always been a challenge. One manager that has impressed us is P/ E Investments, who takes macro views of the world and applies them to systematic models. There arenât any simple moving averages that are ripe for picking used here. The element of this program most worth mentioning is that it has a max monthly stop loss of -5% that forces the systems out of all trades once cumulative losses of 5% are hit for the month. In a typical year, the is max loss is used- once if at all. For context, we have seen the manager pull the ripcord twice this year, which speaks to the amount of unusual market activity weâve seen this year. Despite the struggles, P/E continues to hover around breakeven for the year, which is a testament to their risk management abilities. General Performance: Average Category: Stock Index traders How it works: While it may seem counterintuitive for an asset class so replete with critics of traditional buy and hold stock investing models to have room for a specialization in stock index trading, it exists nonetheless. While the term "commodity trading advisor" (CTA) may conjure images of flowing fields of wheat or bubbling oil wells, there are still futures contracts on stock indices, and these contracts are among the most liquid and high volume futures contracts in the world. For many managers, data is data â and if they develop a model which works best on stock index futures data, so be it â they arenât going to force their model onto Corn or the like just to meet the traditional notion of a âcommodityâ trading advisor. That being said, the volatile nature of these markets requires a flavor of risk management rather distinct from your run-of-the-mill trend follower, and may result in a program beyond the risk palette of the traditional managed futures investor. 2011 Programs of Note: Paskewitz 3X Contrarian, Pere Trading Program, Roe Monticello The Breakdown: Short-term swing trading in stock index markets is the roller coaster of managed futures strategies- it can be exhilarating and terrifying at the same time. Much like their short-term multi-market counterparts, these programs will perform best when there is market follow through on each trade, providing the systems with a chance to bring up their stops and look to reverse in the opposite direction. Thus far, performance has been mixed, with Pere enjoying a healthy run up and leading the pack at +58%... although we advise anyone interested in this strategy to take at the equity curve before getting too excited. Pere is long volatility trading at its finest (and worst). Paskewitz looks like he might finish 2011 up slightly barring a setback in the next two weeks, though today's reversals may change all that. Unfortunately, the Roe program did not perform well at all- down -19.50% before being shut down due to MF Global. General Performance: Average Category: Fixed Income How it works: Whether relying on spread trades, contrarian models or a more traditional trend following approach, fixed income traders focus their efforts on one of the largest markets in the world â the fixed income market â through interest rate futures markets such as the futures on 30yr Bonds, 10yr Notes, 2Yrs, and Euro Dollars. They focus on things like the yield curve, convexity, duration, and such; or use systematic models to know when to buy and sell which bond futures market. The method to this madness can vary dramatically between programs, but the general framework is a belief that all of the economic ups and downs, twists and turns, show up in the bond markets first and foremost. 2011 Programs of Note: 2100 Xenon Fixed Income Program The Breakdown: The long bond trade has been the trade of the year for everyone not named Bill Gross. The 2100 Xenon Fixed Income program has enjoyed the bullish market conditions and is poised to finish the year up around 5% with an end of month max drawdown of -2.31%. 2100 Xenon has exposure to fixed income markets worldwide (trading both long and short), and as such, their performance isnât as glossy as it would have been had they just held long bond futures. However, on a risk adjusted basis, they should finish 2011 near the top of the class. General Performance: Good
Conclusion 2011 was a mixed bag within the managed futures universe, with the average performance likely negative with some notable exceptions, but to gloss over the negative performance of managed futures this year dismissively with a "nobodyâs perfect" type of attitude is an injustice to those invested in the space. Even in a losing year, the breakdowns above give us a taste of just how many opportunities and methods of producing returns (or losses) there are among managed futures programs. Wouldnât we all have loved to have the foresight to diversify our managed futures holdings into a program like spread trader Emil Van Essen at the beginning of the year, or dump discretionary trader Dighton when markets started to get more volatile. But the take away for us lies more in those programs who had run-of-the mill type losing years. For these programs, performance was not what was wanted. But while we, like everyone else, hope that next year brings more profitable results across the asset class, the losses we've faced this year support the expectations for performance associated with given categories (like option sellers losing money when volatility spiked in August). If risk management is your aim, then this year (as odd as it may sound) should actually bring you comfort. It means that the processes driving these strategies are working the way they should. Why is this a good thing? When are losses ever a good thing? For us, it comes down to basic impact calculus. Nobody likes enduring losses on the year, but if that's how your portfolio is built to perform under these circumstances, at least such results were to be expected when looking back at how the year unfolded. On the other hand, investing in a manager with a lucky process (or worse- no process at all) might have gotten you gains this year... but could very well end up as no more than a fluke, potentially dooming your portfolio moving forward. So it's about a known potential impact and an unknown, unfathomable impact- playing your odds versus rolling the dice. Perhaps Barry Ritholtz said it best: I want to be focused on creating a reproducible methodology, regardless of luck or misfortune in any given quarter. Investing is a probabilistic process, and performance can slip for a quarter or two even when the manager is doing everything right. We couldn't agree more. Week in Review : The Trend Before the Reversal Managed Futures Month to date, managed futures are, for the most part, doing their job in December. The bulk of the programs we track are posting gains thus far, even if some of them are tiny in comparison to losses seen earlier this year. Systematic multi-market traders have found a way to latch onto the trends they were missing earlier this year, and even short-term systematic traders seem to have found steady ground. While option sellers, discretionary traders and agricultural traders continue to struggle to some extent, we're hopeful that the current trend continues through the end of the year. - G PS Bouchard Capital (no affiliation), previously noted in this thread, ended the year with a 4.87% return. http://autumngold.com/Advisor/Statistics/cta_profile.php?id=113479