Fri, Mar 24, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Opalesque Futures Intelligence

Does The Stock Market Perfom Positively When Managed Futures Performs Negatively?

Monday, April 22, 2013

During the past 19 stock market crashes, a diversified managed futures portfolio has only experienced negative performance five times. Why does this happen?

If managed futures performs positively when the stock market is negative, is the reverse correlation true? Will managed futures experience negative returns when the stock market is positive? The year to date rise in both the S&P 500 index and equally strong performance of the Newedge CTA index warrants consideration. Or perhaps conversely, when managed futures delivers negative performance has the stock market been delivered generally positive returns?

Strategic Thinking Regarding Why Managed Futures Performs During Negative Stock Market Periods

When a stock market crashes, it volatility often preceded the larger price trend, if one were to look at the VIX / S&P correlation during crisis. Market crashes often start with a surprise event that has altered market perceptions regarding the safety or viability of particular assets. By contrast problems, when systematic problems are identified before hand, are not a surprise and do not necessarily cause the same type of crisis crash. This relates to managed futures in the following respect: This type of logic is used to model portfolios through a debt crisis. (See related article below Fed President Evans Talks Quantitative Easing While Crisis Risks Questioned by Dr. Bob Swarup)

Chart Source CMEGroup: Managed Futures Portfolio Diversification Opportunities

On a strategic level, Managed futures trend following programs are said to perform positively during times of market declines because the market trend lower typically involves a consistent movement in one direction. To prove this, look at a price chart of stock market activity during the circled time periods. Once a market decline progresses, it is said to do so in consistent fashion. Thus, if a trend following program was able to identify the trend lower (which is done based on price action) then the trade remains consistently in place. If the market trend lower were to reverse, for instance, in what is known as a stair step market price pattern, this could trigger the manager's risk limits. The lesson to recognize is that market environments that exhibit stair step, inconsistent price patterns are those in which the trend following program might not excel.

Does this mean trend following (and managed futures in general) would be expected to perform negatively when the stock market rises?

That's actually an interesting math to consider. Let's take a look at it from another, less considered angle.

When managed futures has performed negatively, how has the stock market performed?

Comparing the performance of the two indices side by side, one will note managed futures, as measured by the Newedge CTA index, has performed negatively 46 times over the 120 month study period. During the 46 months of negative managed futures performance, the stock market performed negatively 24 months - more negative months than positive months. In fact, when managed futures did perform negatively - 46 out of 120 months - the average stock market loss was -0.43%. This is just another way to arrive at the conclusion that examination of managed futures returns patterns will reveal that managed futures has a neutral, not negative, correlation to the stock market.

Risk Disclosure / Footnote / Performance sources:
http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--
http://www.newedge.com/content/newedgecom/en/brokerage-services/prime-brokerage/newedge-indices.html
http://www.cmegroup.com/education/files/ManagedFutures.pdf
Past performance is not indicative of future results. Index performance is not necessarily reflective of individual manager performance. Managed futures is not appropriate for all investors.



 
This article was published in Opalesque Futures Intelligence.
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Opalesque Futures Intelligence
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing


  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Hedge fund liquidations in 2016 surpass 2009 levels, new launches decline[more]

    Benedicte Gravrand, Opalesque Geneva: Even as the hedge fund industry's total assets exceeded the $3tln milestone last year, hedge fund liquidations increased. So much so that 2016 had the highest number of liquidations since 2008, claims the latest HFR Market Microstructure Report, re

  2. Hedge funds find no joy in macro as returns lag Trump rally[more]

    From Gulfnews.com: In 2017, macro hedge funds were expected to shine. So far? Not so much. It's been a far from impressive first two months for funds that trade around macroeconomic events. Discretionary funds rose just 0.3 per cent through February, according to Hedge Fund Research Inc., while the

  3. Strategies - Billionaire investor Marc Lasry shares how he's playing markets right now, Classic models are failing FX hedge funds desperate for return[more]

    Billionaire investor Marc Lasry shares how he's playing markets right now From CNBC.com: Buy on the prospect of deregulation. Sell on the enactment of deregulation. That's the strategy that billionaire investor Marc Lasry is implementing, according to an interview with CNBC in Las Vegas

  4. Opalesque Exclusive: Aberdeen makes the case for the lower mid-market[more]

    Bailey McCann, Opalesque New York: Aberdeen Asset Management has released a new paper focused on lower mid-market private equity. According to the paper, this segment of the private equity market is gaining popularity with private equity investors that are looking for multiple expansion and less

  5. Hedge funds await outcome of French elections, feel pinch on lower oil prices & weak dollar[more]

    Komfie Manalo, Opalesque Asia: Hedge funds felt the pinch of lower oil prices and weak U.S. dollar as the Lyxor Hedge Fund Index was marginally down as of the week ending 14 March, Lyxor Asset Management said in its Weekly Briefing. The Lyxor He