Managed Futures down -1% in Jan. (Where’s the Crisis Performance?)

If you took a quick glance at the futures markets year to date on Finviz lately, one might think that trend followers would be giddy over the current market situation; there’s the long trend in Nat Gas (although down significantly over the past few days), Coffee is coming out of nowhere up 20% YTD, Sugar’s is in a textbook drawdown, and Cattle’s up around all time highs {past performance is not necessarily indicative of future results}. Not only that, but the S&P is down around 5.5% for the new year (after shedding -2% as of now…today), and this is starting to feel a little bit like one of those classic crisis period investments managed futures is known for (although being down 5% isn’t quite a crisis).

So why in the world did managed futures finish down in January, with the Newedge Trend Follower sub-Index down an even worse -4.09% {past performance is not necessarily indicative of future results}.  Isn’t this what we have them sitting around for – to perform during a down move in US stocks?

Managed Futures 2014 January(Disclaimer: Past performance is not necessarily indicative of future results)

Not so fast my friends… managed futures are non-correlated with the stock market – not negatively-correlated. For more than you want to know on correlation and this distinction, see the newsletter we pulled the following quick explanation out of:

NON Correlation does not equal Negative Correlation

The problem most investors (and those writing how managed futures are unexpectedly struggling while stocks are as well), is that they are usually sold on managed futures via the argument that they are NON-correlated with stocks and bonds (which they are), but shown an example of NEGATIVE correlation to support the argument.

The example most investors are shown of managed futures NON correlation to stocks is 2008, when the ability of managed futures to put in gains of 13% that year while stocks were down -38% became the stuff of legend [past performance is not necessarily indicative of future results]. Problem is – that example is not of NON correlation, it is of NEGATIVE correlation. The average 3 month rolling correlation between August and December 2008 was a very negative -0.91!

So, the 2008 poster child for managed futures NON correlation is actually an example of NEGATIVE correlation – oops. This no doubt leads to an expectation mismatch amongst many investors where they believe managed futures should perform the same way during each and every stock market down turn (like May or June). They have been led to believe NON correlation equals NEGATIVE correlation, but it means anything but. They want NEGATIVE correlation, but they have NON correlation.

NON correlation means random meandering back and forth between POSITIVE and NEGATIVE correlation (like the rolling 3mo correlation chart above). Investors are down there on the river encountering those bends in real time, sometimes pointing in the direction of POSITIVE correlation with stocks, other times in the direction of NEGATIVE correlation.

Bottom line? There can and will be times where managed futures loses money alongside of stocks, because NON-correlation does not equal NEGATIVE correlation.

So those expecting managed futures to be doing well right now aren’t quite getting the distinction above. For one, this is hardly a crisis.  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 may or may not perform 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.

The immediate problem for managed futures now is that the existing trend most were involved in was UP in stocks, and DOWN in some foreign currencies (the Yen) and Bond markets.  These trends are now being broken (or were broken in Jan), causing losses on the existing positions in those trends. Now, whether this turns into a full blown crisis for stocks remains to be seen, but that is when managed futures (generally speaking) will enter into new trades to capture the downtrend – and that is when they will become negatively correlated to stocks…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 some wounds like the rest of the world’s investors, unfortunately; although the other market trends could keep them doing better.

2 comments

  1. […] Non-correlation does not mean negatively correlated.  (Attain Capital) […]

  2. This is a broken record that has been playing for too long… quit defending crappy performance. There are plenty of opportunities for CTAs to profit from volatility in the markets they trade. Trade short term, bank your gains, then look for other favorable risk/reward setups and trade again. Long term trend followers are dinosaurs in this market.

Write a Comment

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, 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, 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.