Cotton (-20%), Crude Oil (-17.5%) worst performing commodities in May

Well, not exactly – Cotton and Crude Oil were the 2nd and 4th worst, but nobody really trades OJ and Oats. Anyway… wow, that was an ugly month for most anyone not named the US Treasury Bond, Clarke Capital, or Walmart.

We’re looking at 31 of the 39 financial and commodity markets on’s futures page seeing losses in May (all the red over there).

[Please note – finviz does some weird things around contract rolls, which can make their percentage different than what would be found using a continuous contract or the cash/spot market, nonetheless, we feel it is representative. As always, past performance is not necessarily indicative of future results.]

Click to embiggen.

The high lowlights:

  • 79% of markets down
  • 5 markets down over -15%
  • 14 markets down over -10%
  • 28 markets down over -5%
  • Crude Oil down -17.5%
  • Euro Currency only down -6%, felt like -25%
  • Gold down -6%… safe haven?

We’ll see what June brings (we’re hoping for more of the same given managed futures short positioning).

Nobody ever went broke taking a profit?

All anyone can talk about today is the record low interest rates we’re seeing in the US and Germany (10-year US Treasury Bond hit a record low 1.53%, German 10-year Bund hit a record low 1.2%, and the German 30-year fell below the Japanese 30-year – has anyone ever gotten below Japan’s rates?)

But those low rates don’t represent the opportunity to refinance or some other economic event for those Attain clients invested in Clarke Capital. For them – the run up in bonds instead means the outlier gains managed futures (and Clarke Capital in particular) can see over short periods of time. Remember, managed futures in general, and trend following programs like Clarke Capital in particular – are long volatility programs which look to trade in small but frequent losses for large but infrequent gains (so called because that is the opposite of short volatility programs which trade small but frequent gains for large but infrequent losses).

Coming into today Clarke was long nearly every US and European interest rate maturity (multiple positions in each) and short several foreign currency markets – with gross gains in their various programs for May (yes, for just this month) estimated to be in the range of +35% for Worldwide and as much as +55% in Millennium. Wow! Outliers indeed considering their average winning month sits at just over 5% for the Worldwide program.

Now of course, past performance is not necessarily indicative of future results, and Clarke has been down to flat over much of the past 3 years in all of their programs after big run-ups in 2008, proving that point in spades. And one month surely doesn’t make a track record. But it’s not that often we get to talk about these types of outlier returns (in this case having to wait three and a half years). And what’s more, we actually did recommend to clients to get involved with Clarke during their 26% drawdown last May (here and here), so we’ll ask you to please excuse us for tooting Clarke’s (and our own) horn a bit after May’s impressive run.

Now, Clarke isn’t for everyone. Its 3-flag ranking on our website for all but the Global Basic program (2 flags) is a representation of this – essentially saying 40% of the universe of CTAs we rank are better risk adjusted return programs (most definitely due in this case to the roughly 3 times as high volatility of Clarke’s programs over its peers). But there are many clients who like Clarke’s programs given their long (if volatile) track record and lower than normal minimum balances.

It is those clients we were reaching out to today discussing just what they would like to do in regards to these outlier moves. The gist of it is – profits like these aren’t normal. Trees don’t grow to the sky, as we’re fond of saying.  And, Clarke is one of the few managers we work with that is open to the idea of an “equity restart” (their terminology). Clients are given the chance to take open trade profits off the table and reinitiate trading at the original investment level on new signals only. In essence, Clarke allows its customers to ‘book the profits’ from time to time and essentially start over from that point.

But is this a good idea?

Now, before everyone jumps down our throat saying that the whole point of such an investment is to capture these outlier moves in exchange for the lean periods (and down periods), let us explain the idea. We talked at length with Clarke today, asking where the exit points are for many of these trades. The answer (and more coming on this in Monday’s newsletter) was: not much different than the entry risk levels. This means a sharp rally up in risk on assets, resulting in a sharp down move in bonds would likely mean Clarke’s +50% month would be followed by a loss of -25% or more.

Yes, that is partly the risk of such an investment – and trying to cheat the investment gods by booking profits can just as easily result in missed upside as it does in saving the downside. But while $20,000 in missed profits may be equal to $20,000 in saved losses in a textbook somewhere, most clients we talk to think $20K in profits lost is a whole lot different than $20K in profits missed (there’s a famous study on how loss aversion skews our ability to correctly weigh outcomes). We can also see in Clarke’s track record that some of its largest drawdown periods (and indeed this holds true across many programs) follow large run ups like these.

Given the above, most clients we talk to are thinking an equity restart is a no-brainer. But in the famous words of Lee Corso, “not so fast my friend.” You see, the downside of an equity restart is not just the aforementioned opportunity cost of exiting a profitable trade in trending market, but the unknown size of that opportunity cost. Trades such as this crash up in bonds are exactly why we hire trend followers in the first place, to identify a trend and ride it as long as possible. Thing is, it is impossible to say how much further a trend will go.  Bonds could continue to run up (even with the zero bound – see Japan as exhibit A) or go into freefall – and therein lies the rub.  By doing an equity restart – you’ll remove a fixed amount of potential loss for an unknown amount of potential gain. While it is perhaps easy to look at an option seller, for example, and realize that receiving a fixed amount of income (say $500) with the risk of an unlimited loss (say -$50,000) is probably not the best investment method – it is a little more difficult to see that avoiding a fixed amount of loss (say -$65,000) with the risk of missing out on an unlimited gain (say +$190,000) is essentially the same thing, albeit inverted.

So, is an equity restart right for you?  It all comes down to the investor. We don’t usually recommend it, knowing that these are long term investments which shouldn’t really be micro-managed on a monthly basis. But… we also know that people have real money tied up in these investments, and that a gain of 50% in a month is A LOT. If you see other managers you have money with in similar positions, are fearful of a European resolution or bailout hitting the news any day now, or just like the sound of booking profits – it could make sense for you. If you think this move is just the beginning of another 2008-like run lower, or want to let the manager’s models determine the exit, not your emotions (just what we’ve written countless times to clients), then an equity restart likely isn’t right for you.

Sorry to do this… but it’s up to you.

iGlobal Commodities Panel Disappoints

So, we’re at the iGlobal Alternative Investment Summit watching this panel on commodity exposure… and we’re cringing. You’ve got Martin Kremenstein of Deutsche Bank up there pushing his passive commodity indices. His argument was that active managers in commodities aren’t a great choice, largely because they have lock-up periods and limited transparency.


As a heads up, Mr. Martin, if you access commodities through a traditional trend following program via a managed account, you have daily transparency and liquidity. Try again.

We’d have asked what the point of a long-only fund is when they underperform their underlying commodities pretty badly (and can’t go short when needed), but by the time the panel was winding down, our annoyance was full-blown anger at the poor quality of information. From a proclamation that trend following was dead (what?!) to one panelist guaranteeing only alpha via their product (seriously) to the false assertion that managed futures profits are solely derived from the bond trade (we’ve been over this) to a botched handling of the speculation debate (words fail)… well, it was a hot mess. And we were hot under the collar by the end.

Definitely disappointing. Here’s hoping they get a better panel on this subject in the future.

iGlobal Panels- Hedge Funds, Managed Futures, and Regulatory Reform

Panels have continued this afternoon at the iGlobal Alternative Investment Summit, with some great perspectives shared. First up was a panel discussing various hedge fund strategies, with a well-deserved focus on managed futures. Donald Steinbrugge of Agecroft Partners and Justin Shepard of Aurora Investment Management both pointed the space out, highlighting the fact that the asset class has grown faster in assets than any other hedge fund strategy in the past decade. As Steinbrugge put it, “If you’re a pension fund of size, you’re looking at managed futures.”

Another interesting comment related to the size of CTAs that investors have gravitated towards. Size, apparently, is everything. Shocking, right? But at this point, the head shaking continues. As we’ve written about in the past, our research indicates that large CTAs frequently experience a flattening out of returns. Depending on the investor goals, this means that bigger isn’t always better, and this allocation strategy may not yield the desired results from the asset class.

The regulatory panel that followed was also pretty intriguing. The discussion started with that beautiful piece of law that was longer than the US tax code, and perhaps even more hated: Dodd-Frank. Gregory Nowak of Pepper Hamilton LLP spent a good amount of time detailing all the ways in which the law had intended to provide clarity and transparency and failed miserably. With the Fed revealing that they will soon vote on Basel III and Congressional bickering over Dodd-Frank resuming with the fast approaching Volcker rule deadline, the general consensus seems to be that there will no rest for the wicked anytime soon. And that’s why Nowack jokingly referred to Dodd-Frank as an employment guarantee for lawyers.

And for those that were hoping the election and a new administration might help things, don’t bet on it. As panelist Steven Goldburg of Grant Thornton LLP put it, it comes down to Congressional control, and the odds of Republicans getting to that magic 60 vote level in the Senate are slim.  As Nowack added, “Change? Not for at least another decade.”


A Global Macro Guy, Emerging Markets Guy, and Managed Futures Girl walk into a bar…

Ok, so it wasn’t a bar, it was lunch at the iGlobal Alternative Investment Summit, but it does sound like the beginning of an awful geeky financial joke, doesn’t it? As it turns out, it was the start of a very interesting conversation.

While weather may be polite small talk in normal circles, for us market climate chatter is much more common in these settings, and you just can’t get into the markets without talking about Europe. As we went back and forth about Greece and Merkel and more, the conversation turned to how our respective strategies were working in this atmosphere. The emerging markets guy started talking about how cheap Russia is (beware the value trap), when the global macro guy interjected that it’s cheap, but not as cheap as when Russia defaulted (after the aforementioned trap had snapped shut).

Both men had, according to them (we weren’t sharing audited track records, so these could have been fish stories), turned a handsome profit during the time period that brought Long-Term Capital Management to its knees. The emerging markets manager had made “a killing” in bonds (we’re not sure what that position was – long US treasuries, short Russian debt?), while the global macro manager had been on the right side of the ruble when the market took a nosedive. In-depth conversations about the way the Russian banking sector had functionally shuffled itself in the aftermath led the gentlemen to reflect on the similarities to what was happening in Europe and how to position their portfolios to potentially profit from it.

Meanwhile, the managed futures girl sat back and smiled as the two managers contemplated a world with another severe crisis so soon after 2008. For managed futures – which was up 8.72% in the wake of LTCM and 16.73% in 2008 – we won’t mind seeing another crisis. Past performance is not necessarily indicative of futures results.