Why your Best Long Term Strategy might be Short Term

Whenever there’s talk about Managed Futures in the Alternative Investment space, most of the talking is about traditional long term trend following strategies. After all, that’s mainly what drove the success of Winton, Man AHL, Transtrend, John Henry, and more. But as the old (southern Illinois) saying goes – there’s more than one way to shuck an ear of corn… Trend Following is only one of many styles of trading in the Managed Futures space. As noted in our annual review of Managed Futures strategies, there’s also Global Macro, Short Term, Multi-Strategy, Specialty, Ag Traders, Spread, and Options trading.

The ‘short term’ bucket is perhaps the most difficult to really put a label on. Some hear short term and think HFT, others imagine trades exited by the end of the day, while still others consider most anything that isn’t long term trend following ‘short term’.  From our standpoint, the managers which fall into short term trading include those who are mainly momentum, directional based, multi-market strategies whose average trades last from a few hours  to a few weeks. We don’t consider high frequency trading as ‘short term’(we might call it shortest term), nor strategies which hold options for a week at a time, or do delta neutral spread strategies which hold trades for less time than most. For us, short term strategies are pretty much like trend followers and other systematic multi-market programs – just on a much shorter time frame, trying to catch a trend which lasts a few days versus a few months.

But all of this begs the question – how can a managers whose strategy is based in capitalizing on moves that happen in hours to days be a long term investment strategy?

One Man’s Noise, is Another’s Treasure

The idea of Short Term trading is surprisingly similar to traditional trend following strategies, except short term strategies definition of a “trend” can be drastically different. As we noted briefly, short term managers see trends that last a couple of hours as a huge possibility of gains, whereas most traditional trend following strategies see this as pure noise – choppy markets waiting for some sort of confirmation (i.e. moving below a 50 day moving average) on a direction.  This shortened view allows short term traders to zero in on bursts of movement within a choppy move. As an example, take a look at a hypothetical two week span of prices in Crude Oil futures:

Two Week Move Crude Oil

(Disclaimer: Past performance is not necessarily indicative of future results)

Crude only moved up 28 basis points over the two week span, but that end result was made up of a run up near 4%, and pull back of about -5% before arriving at the mostly boring 0.28%. This is very reason that Short Term Managed Futures Strategies exist. They’re after that 4% up move over 3 days and 5% down move over the next 4 days, not really caring where the market ‘ended up’ for the week or month. They’re not content to just chalk those moves up to noise, and attempt to capture them with momentum and counter-trend strategies.

Of course, there’s always a trade off, and with this increased granularity and desire to catch such moves comes the need for increased accuracy from the model due to the increased market risk and transaction costs. Where a long term trend follower is looking to have winning trades maybe 45% of the time, and win about 3 times as much when winning as when they lose – a short term trader may look to only win about 2 times as much when win as when lose, requiring the trade accuracy to be around 60% to maintain the same expected value per trade.

The ‘Winding River’ versus ‘As the Crow Flies’

One of the best ways we’ve heard the ‘short term’ strategy discussed is putting it into some good old American idioms. Ask someone over 70 in the middle of the US how far it is from such and such town to the next such and such town, and they’re likely to say something like… “oh, about 80 miles as the crow flies”, meaning it’s about 80 miles in a straight line, but likely much longer when having to drive down county road 17 over to the highway to the old exit at the mill.

Bringing it back to our world of markets and market noise. Long term traders mostly consider price action in ‘as the crow flies’ terms. They see the market as moving from x to y over a certain period of time, and while they may consider the volatility of the days in such period when looking at risk, the move itself is usually judged just at the end of that period (usually daily, but also weekly or monthly).

Long Term As The Crow Flies(Disclaimer: Past performance is not necessarily indicative of future results)

In contrast – Short Term traders are more of ‘Winding River’ type of people, who view all the bends and curves, inlets and sandbars along the river, not just the total distance covered.  If we look inside of that week over week move and instead consider it on a daily basis – we can see two months of basically no movement suddenly comes to life.

Short Term The Winding Road(Disclaimer: Past performance is not necessarily indicative of future results)

To compare the two in terms of potential market ‘opportunity’, which it should be noted is also the opportunity for loss, the granular view gives many times the level of observed opportunity. Now of course, the short term managers are not able to perfectly capture every market move. The increase in opportunity doesn’t make them better, it just makes them different.

Observed Opportunity Short Term(Disclaimer: Past performance is not necessarily indicative of future results)

Performance Profile:

So how do these short term programs do?  Does the shorter time frame really cause a different return profile?

Well, if we look at the Newedge Short Term Index versus their Trend Following Index going back to 2008, we can see a correlation of 0.51 with the trend following index; with the short term index outperforming its longer term cousins in 2011 and 2013 when long term trend following struggled (past performance is not necessarily indicative of future results).  So, yeah, I guess we can say the time frame difference is causing a different return profile.

What’s more, we’re also able to see a short term program in action day in and day out by viewing the performance of the Short Term Alpha Fund – which is working on its third 4th straight profitable year, and is one of the Attain Portfolio Advisors family of funds (the images above are actually a part of the Short Term Alpha Fund investor presentation).  The Short Term fund’s double digit performance in 2012 and 2013 as traditional long term trend followers struggled shows just how beneficial some time frame diversification can be to those with a managed futures portfolio heavy on trend following (Past performance is not necessarily indicative of future results). Click here for more information on performance data, strategy due diligence, and how the fund does against other short term managers.

Short Term Comparison Last 5 YearsSource: Newedge Short Term Index & Newedge Trend Index

Futures trading is complex, and presents the risk of substantial losses. As such, this may not be suitable for all investors.
The Fund traded a different strategy prior to March 2012, and as such the performance tables and charts herein reflect a hypothetical track record through March 2012 which takes the reported performance of the program now used exclusively by the Fund, the eco Capital Management Global Opportunities Program, multiplies it by 1.5 to reflect the Fund’s trading level, and adjusts it by applicable fees and expenses. March of 2012 to date returns represent actual fund returns, net of applicable fees and expenses. 
While  based on actual performance, investors are cautioned to not place undue reliance on hypothetical pro forma performance.  In addition, regulations require any performance adjusted by a factor other than fees be labeled as hypothetical and the following hypothetical disclaimer displayed: HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.
The brief description of risks herein cannot adequately describe all of the risks associated with an investment in the Attain Short Term Alpha Fund. The fund trades in a variety of futures markets which are highly leveraged, and as a result, returns may be volatile.  In addition, both transparency and liquidity are limited. Before deciding to invest, you should carefully read the entire offering memorandum and consult with your own advisers.
The Fund’s pool operator is Attain Portfolio Advisors, LLC, a wholly owned subsidiary of Reliance Capital Management II, which operates as the introducing broker of the fund. A portion of the fees charged to the Fund by the Trading Advisor are shared with Attain Portfolio Advisors, and a portion of brokerage commissions paid by the Fund to the clearing broker are retained by RCM as the fund’s introducing broker.
Some of the statistics herein refer to indices, which do not represent the entire universe of possible investments within that asset class; and may suffer from limitations and biases such as survivorship, self reporting, and instant history biases.

 

2 comments

  1. […] Best Long Term Strategy Might Be Short Term The folks at RCM/Attain Capital wrote an interesting piece regarding short-term trading strategies within the Managed Futures category. For anyone who knows […]

  2. […] Best Long Term Strategy Might Be Short Term The folks at RCM/Attain Capital wrote an interesting piece regarding short-term trading strategies within the Managed Futures category. For anyone who knows […]

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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.