Top 10 Lessons Learned in Managed Futures – 2011

The year is ending, which means the blogosphere is gorging itself on end of year reflections- especially top ten lists. Being managed futures folks ourselves, we’re all about riding the trend, so we figured, why not hop on this one? Instead of looking at specific moments or trades or programs though, we decided to recommit to the goal of education by presenting the top 10 lessons learned in the managed futures space. Some of these are things we already knew, but were reminded of, while others constituted a swift kick to the shins. Perhaps it has not been the best year ever for managed futures, but it certainly was an informative one.

10. Just because you pretend you’re an authority doesn’t mean you are.

This year has been ripe with missteps by the financial media. From confusion to gross over-simplification to willful dissemination of inaccurate information, the facade of authority granted by a byline has lost its luster. We were so irritated we actually dedicated an entire newsletter to covering ways to properly curate your financial news selection.

9. The Volatiltiy/Trading System relationship came unwound….

Generally speaking, people tend to assume that volatility and trading systems work well together. This is typically a fair generalization, but as the performance of Strategic has aptly demonstrated over the course of 2011, not all volatility is created equal, and the choppy markets have taken their toll on many a beleaguered trading system this year. Even the application of specific filters failed to create an entirely favorable result. The hope is that 2012 will bring more favorable trading conditions.

Disclaimer: Past performance is not necessarily indicative of future results.

8. Timing is everything.

Poor Dighton Capital. A bold bet on the direction of the Swiss Franc earlier this year made a lot of logical sense, but the markets would have none of it. Dighton blew up, losing 32% for the month before all was said and done (Disclaimer: Past performance is not necessarily indicative of future results), and days after getting out of the ill-fated trade, the Franc decided to cooperate as the Swiss government intervened…. As the old saying goes…timing is everything

Disclaimer: Past performance is not necessarily indicative of future results.

7. Nothing is impossible.

Remember that one time we thought American politicians would actually use the debt ceiling as a high stakes game of chicken? Remember that one time where they proved us wrong and made utter fools of themselves? Remember that one time S&P decided they’d had enough of the shenanigans and downgraded the impervious United States of America- eliminating its previously untouchable AAA credit rating? Yeah- that happened. Despite all the hot air from all corners of the investing world, the impossible occurred- humbling for all parties involved (if only for a moment). And since we’re already talking about it…

6. The trend is your friend- until it isn’t.

The trend over the year had been a strong one to the upside in a slew of markets. For a while there, the trend was giving managed futures a nice little performance boost. With stocks sort of hit or miss, it was looking like a good year for managed futures… and then it was the beginning of August. And everything reversed. In a very big way. Trend followers did what they were supposed to- they took the loss. Doesn’t mean it wasn’t a bitter pill to swallow.

Source: Finviz; Date: August 4th, 2011; Disclaimer: Past performance is not necessarily indicative of future results.

 

5. The trend is your friend – until it isn’t (part 2)

Picture this- it’s getting to the end of September, managed futures programs have steadily initiated short positions in ‘risk on’ markets while takig long positions in ‘risk off’ markets – enjoying their best gains of the year as things start looking better for managed futures. They had readjusted to the downtrend, and managed futures programs were looking to gain momentum once more. Cue Columbus Day and then an October which simply went up, up, and up some more across nearly all assets, reversing the just initiated trends in most cases. Suddenly, everything was reversing all over again, and managed futures programs were watching their August nightmares replay with an autumn backdrop. This market surge came at the worst possible moment, making it exceedingly difficult for the asset class to recover in time for positive YTD performance to become an option.

Source: Finviz; Date: October 10th, 2011; Disclaimer: Past performance is not necessarily indicative of future results.

4. Europe is a little bit crazy.  

By a little bit, we mean a lot. The debt crisis is in full swing, but the solutions being proposed are a little less than awe inspiring. Staring down a loose conglomeration of drastically different nations with stark differences in their financial circumstances, the solution to the laborious pile up of debt seems to be… to take on more debt? This move has made the Euro trade a volatile one, with a dizzying ascent in the beginning of the year followed by an incredulous dive back down. Year to date, the Euro is down just over 2%, and managed futures has thoroughly enjoyed shorting it on the way down.  But the Euro hasn’t been the only market impacted. The back and forth nature of the debt negotiations- with each day bringing a new complication or reason to celebrate- fostered an erratic risk on/risk off atmosphere that waged war on the trends managed futures typically looks for… though it looks like one might finally be emerging as the year comes to a close.

3. Ratings agencies are still dumb.

In 2008, the world saw exactly how dim-witted credit rating agencies could be, with the crumbling banking titans certified as AAA right up until the moment the house of cards collapsed. 2011 witnessed continued reminders of this, as agencies kicked their downgrading efforts into overdrive… even if only in threats at times. An attempt to make-up for mistakes of years past? Maybe… but then again, by their standards, MF Global wasn’t considered junk until the day they actually filed for bankruptcy.

2. Option Sellers are still susceptible to swift losses- just in case you forgot.  

Dighton Capital wasn’t the only CTA to take a hit this year; around the same time as their implosion, option sellers were struggling as well. The poster boy for this spiral was FCI, which finished off August down a whopping 51.35% (Disclaimer: Past performance is not necessarily indicative of future results). As we covered at the time, these kinds of losses are the risk you run investing in option selling strategies. You may see small, incremental gains over an extended period of time that provide added value to your portfolio, but if there’s a volatility spike going the wrong way, you could give it all back- and then some- which is why we suggest avoiding becoming Taleb’s turkey through an option selling gain protection strategy.

1. Now is the time for industry unity.

MF Global opened up a lot of eyes. Many didn’t realize the liberal permissions included in 1-25, or the threat of rehypothecation bids gone bad. The assumption was that, in order to get anywhere in this industry, you had to have the same kind of respect for the sanctity of sacred accounts that the clients who depend on them do. Thanks, Corzine, for proving us wrong.

While the disaster has deeply impacted both former MF Global clients and the rest of the industry, it has also prompted the industry to come together in the name of reform and progress. The CME and NFA in particular- initially criticized for their woeful response to the scandal- have stepped up to the plate, attempting to not only remedy some of the issues we discovered in the days following the bankruptcy following, but solve other deficiencies before they have a chance to cause problems. The industry has never been louder, more united or more proactive. While we all could have done without the drama, the upside here is that we’re going to come out stronger on the other side. Here’s hoping that next year sees a continuation of this trend in particular, and a healthy, prosperous year for all of us.

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DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex.  Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.

The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any 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 and self reporting biases, and instant history.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.

Trading Systems Disclaimer:

The trading system returns above are hypothetical in that they represent the percentage returns experienced in a model account. The model account rises or falls by the hypothetical single contract profit and loss of trades generated by the system’s trading signals over the test period. The hypothetical model account begins with the initial capital level listed, and is reset to that amount each month. The percentage returns reflect inclusion of commissions, slippage, fees, and the cost of the system. The monthly cost deduction = number of monthly trades * listed commission + slippage value (default of $50.00 ($30 for eminis) and $125 for S&P). The monthly cost of the system is subtracted from the net profit/loss prior to calculating the percentage return. For systems with one time purchase costs, the monthly cost is calculated by dividing the purchase cost by the number of months in the reporting period.

The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor participation (whether or not all signals are taken) in the specified system, and money management techniques.

Please read carefully the CFTC required disclaimer regarding hypothetical results below.

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.

THESE PERFORMANCE TABLES AND RESULTS ARE HYPOTHETICAL IN NATURE AND DO NOT REPRESENT TRADING IN ACTUAL ACCOUNTS.

Copyright © 2011 Attain Capital Management, LLC. All rights reserved.

ATTAIN CAPITAL MANAGEMENT, LLC.

1 E. Wacker Dr., 30th Floor, Chicago, IL 60601

800.311.1145 (toll free) | 312.604.0926 (d) | 312.604.0927 (f)

www.AttainCapital.com

This communication is intended for the sole use of the intended recipient and is for informational purposes only. It is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. No market data or other information is warranted by Attain Capital Management as to completeness or accuracy, express or implied, and is subject to change without notice. Any comments or statements made herein do not necessarily reflect those of Attain Capital Management, or their respective subsidiaries, affiliates, officers or employees.

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Interested in distributing or reprinting this content? Check out our reprint policy here.

DISCLAIMER

Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

*The mention of specific asset class performance (i.e. +3.2%, -4.6%) is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any 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 and self reporting biases, and instant history.

The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on Attain’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by Attain, and averaging of various indices designed to track said asset classes.

It should be noted that past market performance is not indicative of future market movement.No market data or other information is warranted by Attain Capital Management as to completeness or accuracy, express or implied, and is subject to change without notice.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.