When Disaster Spells Opportunity (And When it Just Spells Disaster)

It’s strange to think that it’s been a year since the devastating earthquake first hit Japan, sending the markets roiling as a catastrophic tsunami followed up the initial destruction in Mother Nature’s 1-2 punch (with a little manmade flavor added by the nuclear reactor meltdown). At the time, the silver lining to the disaster was that it seemed like the perfect set-up to let managed futures shine via their historic crisis performance. Unfortunately for managed futures investors (but fortunately for the rest of the world), the tsunami and nuclear meltdown never turned into the full blown global economic crisis many at the time predicted it would.

At first, it was merely a matter of timing. Those clamoring for managed futures to step up to the plate in the days following the crisis were going to have to be patient. As we explained at the time:

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 underperform 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.

So then we waited. And waited. And waited. The problem was that we never actually saw those strong down trends emerge. There was the initial wave of panic selling all ‘risk on’ assets, and then nothing more. And what’s worse, we actually saw a rather sharp reversal off of the post Japan crisis lows causing a good portion of the 2011 losses for managed futures.

It’s a year later, and the markets have all but forgotten about the Japanese earthquake, but what’s too often forgotten is that the people of Japan are still very much reeling in the aftermath and attempting to rebuild their lives. Our hearts and thoughts go out to the survivors as they pick up the pieces and move forward.










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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, 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.