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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