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Managed Futures Performance: Uncorrelated Managed Futures Lives Up to Its Name

Friday, December 02, 2011

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.

Opinion:

US Dollar:

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.

Equity Markets:

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. 
For additional managed futures commentary as it extends to market environment, make sure to read the Options Futures Strategies publication.       

Risk Disclosure:

MANAGED FUTURES IS NOT APPROPRIATE FOR ALL INVESTORS.  IT CAN INVOLVE VOLATILITY AND RISK OF LOSS.

While this article is written with balance and accuracy in mind, the content is designed for sophisticated qualified eligible persons.  It is not appropriate for all individuals. 
Qualified eligible person as defined under the (CFTC) Regulation 4.7., because they are: Registered investment company; Bank; Insurance company; Employee benefit plan with >$5,000,000; Private business development company Organization described in Sec. 501(c)(3) of the Internal Revenue Code with >$5,000,000 in assets; Corporation, trust, partnership with >$5,000,000 not formed to invest in exempt pool; Person with net worth >$1,000,000; Person with net income >$200,000 each of last 2 yrs. or >$300,000 when combined with spouse; Pool, trust separate account, collective trust with >$5,000,000 in assets;  User also confirms they meet the following Portfolio Requirement: Own securities with a market value >$2,000,000; Have had on deposit at FCM, in last 6 months, >$200,000 in margin and option premiums; Have combination of securities and FCM deposits. The percentages of required amounts must = 100%.

Opinions:

User represents themself to be a sophisticated investor who understands volatility, risk and reward potential.  User recognizes information presented is not a recommendation to invest, but rather a generic opinion, which may not have considered all risk factors.

User recognizes this web site and related communication substantially represent the opinions of the author and are not reflective of the opinions of any exchange, regulatory body, trading firm or brokerage firm. The opinions of the author may not be appropriate for all investors and there is no warrantee relative to the accuracy or completeness of same.  The author may have conflicts of interest, a disclosure of which is available upon request. 

RISK DISCLOSURE

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD THEREFORE CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. THE HIGH DEGREE OF LEVERAGE THAT IS OFTEN OBTAINABLE IN COMMODITY TRADING CAN WORK AGAINST YOU AS WELL AS FOR YOU. THE USE OF LEVERAGE CAN LEAD TO LARGE LOSSES AS WELL AS GAINS. YOU COULD LOOSE ALL OF YOUR INVESTMENT OR MORE THAN YOU INITIALLY INVEST. IN SOME CASES, MANAGED COMMODITY ACCOUNTS ARE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT AND ADVISORY FEES. IT MAY BE NECESSARY FOR THOSE ACCOUNTS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS.

THE DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF THE PRINCIPAL RISK FACTORS AND EACH FEE TO BE CHARGED TO YOUR ACCOUNT BY THE COMMODITY TRADING ADVISOR (“CTA”). THE REGULATIONS OF THE COMMODITY FUTURES TRADING COMMISSION (“CFTC”) REQUIRE THAT PROSPECTIVE CUSTOMERS OF A CTA RECEIVE A DISCLOSURE DOCUMENT WHEN THEY ARE SOLICITED TO ENTER INTO AN AGREEMENT WHEREBY THE CTA WILL DIRECT OR GUIDE THE CLIENT’S COMMODITY INTEREST TRADING AND THAT CERTAIN RISK FACTORS BE HIGHLIGHTED. THIS DOCUMENT IS READILY ACCESSIBLE AT THIS SITE. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL OF THE RISKS AND OTHER SIGNIFICANT ASPECTS OF THE COMMODITY MARKETS. THEREFORE, YOU SHOULD PROCEED DIRECTLY TO THE DISCLOSURE DOCUMENT AND STUDY IT CAREFULLY TO DETERMINE WHETHER SUCH TRADING IS APPROPRIATE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.

YOU ARE ENCOURAGED TO ACCESS THE DISCLOSURE DOCUMENT. YOU WILL NOT INCUR ANY ADDITIONAL CHARGES BY ACCESSING THE DISCLOSURE DOCUMENT. YOU MAY ALSO REQUEST DELIVERY OF A HARD COPY OF THE DISCLOSURE DOCUMENT, WHICH WILL ALSO BE PROVIDED TO YOU AT NO ADDITIONAL COST.

MUCH OF THE DATA CONTAINED IN THIS REPORT IS TAKEN FROM SOURCES WHICH COULD DEPEND ON THE CTA TO SELF REPORT THEIR INFORMATION AND OR PERFORMANCE. AS SUCH, WHILE THE INFORMATION IN THIS REPORT AND REGARDING ALL CTA COMMUNICATION IS BELIEVED TO BE RELIABLE AND ACCURATE, PUBLISHER CAN MAKE NO GUARANTEE RELATIVE TO SAME. THE AUTHOR IS A REGISTERED ASSOCIATED PERSON WITH THE NATIONAL FUTURES ASSOCIATION.

No part of this publication or website may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher.



 
This article was published in Opalesque Futures Intelligence.
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