2011 Opportunities and Risks
We asked Richard Singer, Jay Ramey and Stephen Klawitter what they expect in the
new year. Messrs. Singer and Ramey are managing directors of Triton Capital
Advisors and Mr. Klawitter is senior vice president at the firm. Below they talk
about managed futures performance, strategies and investors.
Triton, founded in 2009, helps clients select commodity trading advisors. The
executive team previously worked together at Altegris Investments as well as
other firms. Mr. Singer was a CTA from the 1970s into the early 1990s.
Opalesque Futures Intelligence: What's in store for futures markets?
Richard Singer: Today there are many more futures markets and
participants than there were when I started trading futures in 1971. Then it was
more of a natural resource environment which included grains and metals (no
gold, though). But there were no futures for stock indexes, interest rates,
energy and currencies. Investing in the commodity markets started to change
dramatically in 1970s, when we experienced poor global grain production while
worldwide demand for grains expanded. That, coupled with a falling stock market,
led to more people entering futures trading and new markets evolved. Futures
became a very viable investment vehicle. In the 1980s commodities took a back
seat as equities came out of their long bear market, but world demand and
markets kept on growing. I expect new players will continue to enter futures
markets as China and other third world countries fuel global economic growth and
raw materials demand.
OFI: Where is futures growth coming from?
Jay Ramey: Bullish commodities trends continued in 2010, primarily in
non-cyclical commodities like gold and agriculture, with some of the highest
growth in futures trading volume coming from China and other emerging markets.
Emerging markets have a long way to go, which bodes well for futures markets.
RS: The impetus is not only from China but more broadly from emerging
markets, in particular India and Brazil, even some frontier economies. Emerging
markets will certainly remain a strong theme into next year. Industrialization
fuels demand for futures. We should see markets expanding even further.
OFI: What helped CTAs in 2010?
Stephen Klawitter: There were strong trends and broad-based trend
rotation amongst futures sectors throughout the year. The first half was about
financials such as currencies and bonds, while the second half was dominated by
strong momentum in commodities as well as currencies. In currencies, CTAs made
good money trading the euro, yen, Australian dollar and Canadian dollar. One
broad theme is cross-currency relationships between developed economies and
emerging markets, which is commodity related. Another is the direct commodity
story. Either of those themes can be profitable for managed futures but in the
near term the commodity story is stronger.
JR: We saw a gradual increase in energy prices while wheat and other
grains rose rapidly in the third and fourth quarters. Higher commodity prices
seem to be supported by fundamental demand now, rather than resulting from the
weakening dollar. We think these price trends in global markets will continue in
2011, offering CTAs trending volatility to execute their strategies. We may
continue to see the dichotomy of weak developed economies while commodity
inflation is fueled by strong EM growth. However, US demand for raw materials
could re-balance after two years of weakness, while China deals with
RS: Judging from a similar scenario in the 1970s of commodity price
spikes, such trends can last for some time. But as prices accelerate, volatility
rises and price corrections can become steeper. There are so many interesting
possibilities. With fast-growing demand for grain there's always the looming
fear of poor weather conditions. We could have a very explosive situation
developing. The effect of this alone on global inflation would show up in
interest rates, currencies and other commodities. That is one of many potential
scenarios that would create trends the CTA community should be able to take
OFI: Do commodities still offer opportunity?
SK: Commodities were a major contributor in the second half of 2010. To a
degree the expected decoupling of EM from developed economies is finally
happening. With demand from fast-growing emerging economies a dominant factor,
commodity markets have become fundamentally-driven rather than a technical
function of US dollar sentiment. That is a boom not only for EM suppliers of raw
materials but also futures traders. While the majority of CTAs are systematic,
they can take advantage of the fundamental commodity story by catching the price
appreciation and trends. This EM market commodity theme will probably continue
for years, but we will see intermittent periods of high volatility coupled with
pullbacks, which has been the pattern in commodities for years. I can't imagine
several of individual commodities not going much higher, though.
OFI: What are the dangers for managed futures?
RS: We could enter an environment like 2009, which lacked sustainable
trends. Trends that did break out were ephemeral and there was a lot of noise.
It has been a smoother ride this year, but sudden changes in direction can
adversely affect CTAs.
JR: CTAs tend to lose money when markets suddenly change direction and
established trends reverse. November was a perfect example. Between fears of
European debt contagion, the confrontation between North and South Korea and
China raising interest rates to curb inflation, everything pulled back. The
reversals and disrupted trends were problematic for many CTAs.
SK: Trends tend to last three to six months. While there may be a
multiple-year bull market in commodities, within it there will be consolidations
and pullbacks. Then the trends will resume. The world economy is rebalancing
between developed countries and EM. This dynamic will create the impetus for
trends and momentum and thus opportunities for CTAs, but the process will be
bumpy, not smooth. Investors that understand this characteristic and are willing
to stay with the investment have a good shot of making money over time.
OFI: Does 2011 pose special challenges?
RS: Toward the end of 2011 the US will move into the 2012 election mode.
Figure out the risks from that. CTAs have the ability to be flexible in high
volatility environments. As trends come and go, patient managed futures
investors will benefit.
JR: I feel more confident now than I did at the end of 2009. The markets
have generally reverted back to trending conditions in both financial futures
and traditional commodity markets. The global economy remains uncertain and we
believe managed futures offers the flexibility investors look for to participate
in global price trends.
OFI: Do you like systematic or discretionary strategies?
JR: The managed futures industry is comprised primarily of systematic
traders. We prefer systematic strategies and believe it should be the core
trading style within a diversified managed futures portfolio. We believe in
systematic trading because it is free of human biases. A diversified managed
futures portfolio should also contain discretionary managers but we give more
weight to systematic traders. In 2010 systematic trend followers were winners- a
change from the previous year.
SK: Most of the capital allocated to managed futures is in systematic
trend-followers, because they have proven longevity and the strategy works. The
diversification and non-correlation benefits of managed futures largely comes
from its systematic nature- the ability to go long and short in a completely
agnostic fashion. So it complements most other investments which are mostly
OFI: How about short-term traders?
RS: The problem there is that they trade more and can get whipsawed more
than trend followers. There is a time and place for all investments, but you
need to start with trend following as the core.
JR: There are good, established short-term managers but they are few and
far between. I find that there is more rotation among short-term traders than
among trend followers. You see more short-term managers come and go. We do,
however, feel short-term traders have a place within a diversified portfolio.
SK: Short-term trading is a very difficult space to be successful in.
There are a lot of things that can go wrong when you trade on a short time
frequency versus following long-term trends. Positioning short-term traders in a
portfolio requires care. It's not as simple as selecting a group of short-term
traders and expecting them to make money when trend followers don't. We pay a
lot of attention to the weight of short-term traders versus trend followers in a
OFI: What do investors want?
RS: The mantra is liquidity and transparency. And people want greater
diversity. Futures meet all those needs.
JR: Over the last three years we have seen extreme market conditions and
as a result investors are looking for better risk-adjusted returns. We've seen a
shift in institutional portfolios to increasing allocations to alpha-driven
managers. Investment advisers and individual investors want liquid and
transparent global investments that have the potential to enhance the returns of
their portfolio. Managed futures is part of that broader shift.
SK: Over time managed futures has migrated to more traditional investment
settings and earned a place in conventional stock/bond portfolios. This will
continue to happen, albeit slowly. Managed futures is one of the few investments
that are truly uncorrelated to tradition asset classes. But investors must
understand the characteristics of managed futures. Otherwise there is a real
risk that they will get into the asset at the top and exit at the bottom. There
is a cycle to the strategy just like there are market and economic cycles.
Because of unrealistic expectations clients may liquidate their managed futures
investment that is down say 10%, but hold onto an equity investment that is down
50%! That kind of sentiment will change but it takes time. At Triton we spend a
lot of effort on investor education. I don't see that changing.
OFI: Are there new investors coming into managed futures?
SK: Institutions, pensions, endowments have been investors in managed
futures for years. Individual sophisticated investors have been buyers for a
long time as well. We work with a number of such individuals. But investors
below the $1-to-$2 million net-worth level tend to have much less experience in
alternatives, including managed futures. How to invest in managed futures is an
important question, because there are different access points - managed accounts
versus funds - and a wide disparity between the quality of firms, pedigree of
talent and length of track record.
JR: We also work with registered investment advisers who are looking for
a competitive approach to finding and accessing premier managers. Financial
advisers understand that you need both buy-and-hold investments and
absolute-return trading strategies like managed futures.
OFI: Do clients prefer separate accounts as the best way to invest?
SK: A lot of people in the industry probably won't agree with this, but
we don't think managed accounts are practical for most investors, particularly
newer ones. Trading commissions tend to be high, over-leveraging can be a
troublesome, and it does not typically lead to a long-term successful investment
experience. To get the best use of a managed account we think an investor should
thoroughly understand how it works and it's the responsibility of professionals
in this industry to cover this with their clients. We focus on managers,
programs, and access points that we think will help keep our clients invested in
managed futures for the long haul.
OFI: Will new rules change managed futures?
RS: It don't think so. Regulators will make noise to keep everybody in
line - which is good in that it brings a sense of order to the marketplace - but
futures markets work well and are driven primarily by supply and demand. I can't
see how additional regulation can improve futures markets in any meaningful way
or change the way free markets operate, short of shutting them down.