We’ve been waiting for a rise in interest rates for years… especially in the world of managed futures, which tend to do well during moves in interest rates. Unsurprisingly, we’ve been watching the recent moves very closely. That’s why a post on The Big Picture caught our attention – showing that despite rates moving higher by 20% recently, this move is barely a blip on the chart of the multi-decade bull run in bonds (rates lower). The piece includes a nice table of such bond “spikes” back to January of 2008, including the magnitude and duration of the spikes. We love tables like that; it gives us a good opportunity to see how managed futures lined up during those same periods.
So how did they do? We re-created the chart by David Rosenberg and added columns for managed futures (Newedge CTA Index) and stocks (S&P 500).
Past performance is not necessarily indicative of future results.
Interestingly enough, while many managed futures participants are eagerly waiting for the day when rates really start to move higher (yes, there is a sliver of the world out there who wouldn’t mind seeing rates go higher), spikes in rates over the past few years have not been kind to managed futures.
What’s going on here? Well, the trend in bonds over the last few years (actually, over the past 40 years) has been up (rates down), and spikes in rates represent reversals of that predominant trend. Managed futures, on the whole, don’t like these reversals- and especially don’t like them when they only last 21 days on average, as these have. You see, a systematic trend following program isn’t just looking at when trends start, but also must assess when they end. At least half the magnitude and/or duration of these spikes were likely the exit signal for CTAs to get out of long bond positions, leaving just a portion as an actual move to be followed.
Problem is, with the relatively short duration of these spikes, as soon as systematic models shifted their positions; the spike had run its course, leaving managed futures programs losing out on the reversal from their long position, and causing losses on the new short position when the movement didn’t last. While quick, sharp moves don’t tend to work in managed futures’ favor, if/when a spike continues in that direction – watch out… we could see some of that outlier performance managed futures longs for (or shorts for, in this case).