With stocks back at all-time highs, one might think managed futures programs – you know, the poster child of performing during stock market crisis periods, would be sucking wind. After all – managed futures (SG CTA Index) posted gains of +7% back when stocks took a dive (falling -10%) in January-February, so you might think they would be down some ugly percentage while stocks have rallied back over 19.41%.
But something funny happened on the way to turning in their asset class scorecard – managed futures found return drivers in metals, bonds, and even stocks themselves – to actually move to positively correlated with stocks right now – just five months after being negatively correlated to them. You can see the Attain Short Term Fund in the table up +13.75% on the year, at the same time stocks are up 7.75% on the year – all while having an all time correlation of -0.36 and seven-month correlation of -0.89.
(Disclaimer: Past performance is not necessarily indicative of future results)
Stocks = S&P 500
What… How can two negatively correlated investments both by in positive territory for the year?
Let’s first back track a minute and define correlation. Here’s a simple review from an old newsletter of ours:
You can think of correlation as the numeric connection between two events. The number of people wearing shorts in Chicago, for example, is positively correlated with how warm the temperature is, while the number of people wearing gloves is negatively correlated with how warm the temperature is. The warmer it is, the less people wear gloves and the more people wear shorts. While we can easily see that connection in our minds – seeing such connections between investment returns can often prove difficult.
More specifically, correlation is a statistical figure with values which range between -1.00 and +1.00, meant to show how inter-related two sets of data are (in the case of investments, we are usually looking at the monthly percentage returns). If they have a correlation of 1.00, they are perfectly correlated, meaning when one market rises 3%, the other will do the exact same, and when one loses -2%, so will the other. If they are at -1.00, they are exactly opposite; with one making the exact opposite amount the other loses each month, and vice versa.
While not statistically correct, a good mental shortcut you can use is to think of the correlation statistic as a sort of percentage of similar readings. So, a reading of 0.50 roughly means that 50% of the data set moved together, -0.80 meaning that the data set moved in opposite directions about 80% of the time.
Where that shortcut doesn’t work, and where correlation gets confusing is at values between roughly -0.5 and +0.50. That is the range of NON correlation, where the data has no discernable pattern, sometimes moving in tandem, sometimes moving opposite. Problem is, it is hard to visualize the absence of something – and most investors equate non-correlation with negative correlation as a mental shortcut.
We find it helpful when thinking about correlation to imagine it not as an absolute value defining what will happen each month, but rather as an average of what happens month to month. We all tend to think a long term correlation reading of around 0.00 means a bunch of shorter term correlations of around zero – but it can just as easily mean a bunch of high positive correlations of +0.80 or higher averaged with a bunch of negatively correlated values -0.80 or lower.
Just look again at the short term fund – which posted gains of +8.73% in 2014 when stocks were up +13.53%; posted a small loss of -1.85% last year when stocks were up 1.34%, and now finds itself up 13.75% on the year when stocks are at all-time highs. That is what non-correlation looks like, a ragged mixture of positive and negative correlation depending on the time frame you’re looking at, all averaging together to result in non correlation.
To see more performance and how it works, click here to download the Short Term fund factsheet.
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.
The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.
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. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.
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.
Limitations on RCM Quintile + Star Rankings
The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.
See the full terms of use and risk disclaimer here.