We have long trumpeted the power of managed futures to perform in a crisis (see here), but are looking at a lot of red for managed futures today… down -2% to -2.5% as an asset class by our estimate. And this is on top of monthly losses of about -1% for the Newedge CTA index already.
So where is the crisis period performance? Isn’t this a textbook crisis? Regime changes, nuclear fallout, war in the Middle East… it sure seems like all the crisis bases are covered.
Well, as always – the devil is in the details. You see, when we talk about crisis period performance for managed futures, we’re talking about periods longer than a single day, week, or even month. We’re talking about periods in which traditional investments see major shifts (2007 to 2008 is the classic example, when stocks and commodities fell over several months).
In our opinion, crisis periods have two parts. One is the crisis itself, which usually causes a reversal of the current market trend (in this case current trend was stocks, foreign currencies, commodities up; bonds and US Dollar down). The second part is the aftermath of the crisis in which new market conditions and trends emerge.
Managed futures generally outperform during the second part of the crisis, and underperform during the first part. The thing is, traditional investments usually underperform in both parts – suffering during the crisis itself, and then continuing to struggle with their long only bias.
This looks a lot like 2008 to us, in which commodities saw a sharp reversal off of all time highs, causing pain for managed futures from July through September, before the aftermath portion of the crisis kicked in through October, November, and December. [Past performance is not necessarily indicative of future results]
The immediate problem for managed futures is that the existing trend most were involved in was UP, with recent multi-year highs in stocks, metals, grains, softs, and meats. These trends are now in danger of being broken, with several markets at their annual lows and approaching their November ’10 lows; causing losses on the existing long positions.
Should those November lows be taken out, look for managed futures to shift (broadly speaking) from an overall long stance to an overall short stance. And should the markets continue lower from there – that is when we’ll see managed futures shine as a crisis period performer.
Until then, managed futures will be licking their wounds like the rest of the world’s investors, unfortunately.