Is your portfolio Zombie-proof?

Who said zombies and finance can’t mix? A recent piece by David P. Goldman in the Asia Times reflected on the recent behavior of the U.S. economy and its future, ultimately concluding that we’re in for a whole lot of nothing on the future. The economy, by his measure, is currently the walking dead. As he puts it:

“The so-called American economic recovery won’t die, because it’s undead. It was a zombie to begin with. Equity investors during the past six weeks came to the collective conclusion that the US is not in the early phase of an economic recovery, but in the endless middle of a structural slump, in the term of Nobel Prize winner Edmund Phelps.”

He includes an interesting graph on realized volatility, showing that the recent sell off from the May highs is not the type of negative return/higher volatility data point we would expect, showing a loss of about -5% with associated volatility of about 13.5 – versus the previous eight -5% periods having a realized volatility of between 23 and 33, or about 2.2 times as high.  Indeed, the recent stock market loss has the lowest volatility of any such loss over the past four years.

Mr. Goldman’s conclusion as we read it is that we are in for more of the same, due to the artificially low interest rates where banks happy to borrow at zero and loan back to the Fed at slightly above zero (a risk free trade), and the fear of companies to spend on building up inventory.

And here’s where it gets interesting in regards to managed futures. Such a slow grind lower would likely not be in the best interest of managed futures, who are ‘long volatility’ type programs which look for breakouts to new levels; as a slow grind lower would likely include many false breakouts via returns to the mean, and no substantial moves away from the mean (all within the context of a downward trend we would expect managed futures to participate in).

Managed futures losing money during an extended stock market decline is a growing, yet unspoken (up to this point), worry in the managed futures industry, with the logic that 1. We only have a small data set of crisis periods to base managed futures performance on looking backwards, and 2. Managed futures and stocks are non correlated (not negatively correlated).

For an industry which has built its reputation on ‘crisis period’ performance (outperforming stocks during down markets), not delivering would be a big problem.

So is Mr. Goldman correct?  Are we in for a ‘new normal’ where volatility declines alongside the stock market.

We’re not so sure. One, such calls for a ‘new normal’ where earnings and volatility are low are usually met with the exact opposite transgressing. And indeed, we saw a spike up in the VIX last week just as we were contemplating writing this piece (whenever you want something to happen in the markets – just start planning a newsletter or blog post on the opposite of that happening, and voila – you get your result)

Two, history is ripe with examples of low volatility periods ending with spikes higher in volatility, and indeed it is often used as a contrary indicator for upcoming market declines.

Three – one data point does not make a conclusion.

Four – it may not matter for managed futures whether he is correct or not, as long as there is expanding volatility elsewhere. There could be low stock market volatility coupled with a declining stock market – but high volatility elsewhere in bonds, currencies, energies, etc. which fuel managed futures returns.  Managed futures non correlation with stock markets does not come from just its ability to go short stock indices, but also its involvement in myriad other markets and (hopefully) trends.

We’ll see what the future holds for Zombinomics and managed futures.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.