Managed Futures Performance:
Uncorrelated Managed Futures Lives Up to Its Name
The Thanksgiving holiday week in the U.S. is typically a period of traditional strength in equity markets. However, the market reality of a debt crisis without easy solutions got in the way this year, as the S&P 500 index fall by 4.7% and the Dow Jones Industrial Average turn in one of the worst showings since 1932. While this may clear the path for a short term Santa Claus rally, an interesting question is how did uncorrelated managed futures investments perform?
During that same week, the NewEdge CTA index was positive by +0.56% and was up +1.76% month to date as of the close November 25. Highlighting what has generally been a negative year for managed futures, the NewEdge CTA index was off by -3.38% year to date.
What drove managed futures during this period of negative equity performance? Let’s consider the various market environments on a weekly basis.
Based on momentum indicators, price persistence in the U.S. dollar began to appear early in the month, climaxing the last two trading days of the week. This would potentially benefit trend followers whose algorithms caught the buy signal. On a spread arbitrage basis, the spread between the Dollar and Euro widened, testing the outer band of recent support. Spread arbitrage programs long the dollar and short the Euro might have benefited during this market environment. Volatility appeared to mildly spike during this time period, but stayed within what might be considered a range. This market environment might be considered generally positive to neutral for short volatility programs, as prices remained in a range. Long volatility programs might have experienced slightly negative performance depending on their positioning relative to how close to the money their spreads were positioned.
In interesting contrast to the Dollar, which might have been viewed as a safe haven during the Eurozone debt crisis, US equity markets headed lower and spiked in volatility. While certain momentum indicators might have given a sell signal early in the month, the signal has not been confirmed by other trend identifying models. While each CTA will generally have a very unique set of trend indicators, they are mostly based on consistency of price momentum in a market. In other words, while equity markets headed lower, not all trend followers might have taken this trade. Interesting to note the spread between the S&P and small cap Russell which widened over the week, but this spread appears to be within normal bounds of relationships between the two products. While volatility spiked to the downside, such volatility did not exceed previous ranges. S&P short volatility put plays may have gotten hit during this period of time, but without exceeding any range the damage could be temporary as traders await options expiration. As a cautionary note, professional investors with assets placed with un-hedged short volatility plays in S&P put options might want to make sure they fully understand the risks in a significant stock market selloff.
MANAGED FUTURES IS NOT APPROPRIATE FOR ALL INVESTORS. IT CAN INVOLVE VOLATILITY AND RISK OF LOSS.
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