9 Markets in Backwardation and Contango

At the beginning of the year, we came out with some serious and some not so serious suggestions to play the Crude Oil inevitable rebound, and one of them included buying a contract 12 to 18 months out instead of trying the ever so popular oil ETF $USO.

The ideas of contracts at different months with different prices, expiring on different days is something our equity market friends aren’t that familiar with. Let’s take Crude Oil for instance. For example, if one was to buy an April 2015 contract, it would be priced at 49.28, compared to a contract set to expire in September of 2015 priced at 58.00. For a more visual display of such a difference, here’s the price difference of contracts every 6 months (March ’15, September ’15, February 2016, and July ’16). For the most part the contracts trade at the same level until these become the front month contract, and in so, become the most liquid contract to trade.

Crude Oil 6 months(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Barchart

This is just one of many ways to chart the differences in prices of contracts by month. Charting out the price difference by months chronologically would display what’s called a “price curve.” This curve is actually incredibly important to some managed futures strategies because some of their strategies are based solely if a market’s price is higher or lower in the further out months. We in the biz like to use the phrases Backwardation and Contango. Back in 2013, we went into detail on the definitions of the two, but the Sparknotes version is that a downward sloping price curve (further out prices are lower than current/nearer prices) is called backwardation and that an upward sloping curve where prices are higher and higher the further out in time you go is called Contango.

Simple enough. But here’s where things get a little tricky. If the market is in Contango, the investors in ETFs following that market typically see underperformance from that market structure itself. This is because the ETF has to pay the roll yield, which means they have to sell the contract before it expires at the lower price and buy the further out contract at a higher price. Last year we looked at which markets are in Backwardation and Contango, and here’s an update:

Markets in Contango:

Crude(Disclaimer: Past performance is not necessarily indicative of future results)

Coffee(Disclaimer: Past performance is not necessarily indicative of future results)

US Dollar(Disclaimer: Past performance is not necessarily indicative of future results)

Corn(Disclaimer: Past performance is not necessarily indicative of future results)

Wheat(Disclaimer: Past performance is not necessarily indicative of future results)

Markets in Backwardation:

Emini SP(Disclaimer: Past performance is not necessarily indicative of future results)

10yr note(Disclaimer: Past performance is not necessarily indicative of future results)

Mixed Markets:

Gold(Disclaimer: Past performance is not necessarily indicative of future results)

Lean Hogs(Disclaimer: Past performance is not necessarily indicative of future results)

Alternative Links: Podcasts

“It’s not about trying to make all the trades a winner – it’s about having the average win be much greater than the average loss – and that is asymmetry.” 

Why You Don’t Want Symmetry in Investing – (Top Traders Unplugged)

Masters in Business: Cliff Asness – (Barry Rithlotz)

Managed Futures:

Managed Futures Global Volatility: Consider Global Macro and Managed Futures Strategies  to Hedge Potential Equity Bond Volatility – (Bill Burns)

Attain’s Managed Futures Rankings – (Attain Alternatives Blog)

Big Names in Managed Futures:

Barclay’s David Walker Joins Winton – (FT)

Man Group moves away from Managed Futures – (Value Walk)

Crude Oil:

Diverging developments in oil markets vs. energy shares – (Sober Look)

Probe:

Banks Face U.S. Manipulation Probe Over Metals Pricing – (Bloomberg)

EU Opens Probe of Cargill Buying ADM Chocolate Business – (Wall Street Journal)

Managed Futures Rankings

We doubt anyone is staying up all night waiting to see who made it into our semi-annual rankings the way they watched  Doogie Howser dishing out awards in his underwear; but we do take this stuff seriously around here, and are excited to announce we just finished calculating our latest Semi-Annual Managed Futures Rankings, updated through January 2015. The rankings are something we do every 6 months in pursuit of answering that eternally difficult question to answer: “What’s the BEST managed futures program?”

2015 Badge

Who’s the best is a tricky question? Do you mean: Best last year? Best for all time? Best risk adjusted return? Best in terms of lowest drawdowns?

We’ve dedicated extensive resources over the years to analyzing and testing a rankings system that would best reflect what we believe to be the important metrics for measuring skill in this investment space. Our rankings start by filtering the BarclayHedge database to a smaller subset of managers which have at least 36 months of track record, are registered with the NFA, offer managed accounts, and are viable business concerns (no prop trading records for example).

Overall, there are 8 separate categories, from best programs with risk adjusted performance, best reward managers, as well as best on our Attain Focus list. Click here to download the report and see who made it. There’s many newcomers after a banner year for managed futures in 2014, while many familiar names continue to dot the rankings as they have done report after report for years. Enjoy! And don’t forget to pick up the phone and dial our team with any questions on the who, what, when, and why behind all of the managers listed.

10 of the Best Managed Futures Performers in January

While one month’s performance is no way to judge an investment that has 3 to 5 year cycles, a glance at who’s doing well in the different environments month to month can be a useful data point at times. Here’s the top managed futures performers (by return only) for the month gone by:

Note: These programs are not necessarily recommended by Attain. For a list with much more thought behind it – check our semi-annual rankings (updated July 2014). New rankings coming this week.

 (Disclaimer: past performance is not necessarily indicative of future results. Programs listed consist of those with at least a 3 year track record tracked by Attain Capital Management for investment by clients via managed accounts and do not represent all available programs in the managed futures universe.  The Max DD represents the worst drawdown of all time for the listed programs).

Managers and ProgramsJan. RORMax DDMin. Invst.
Purple Valley Capital - Diversified Trend 19.55%-49.34%1,000,000
KeyQuant SAS - Key Trends (QEP)15.74%-19.15%10,000,000
Quality Capital - Global Diversified (QEP)13.51%-38.77%10,000,000
Conquest Capital -- Conquest Macro (QEP) 13.23%-56.09%10,000,000
IMFC -- Global Investment (QEP)13.08%-20.27%2,000,000
Clarke Capital -- Jupiter12.15%-44.78%3,000,000
Dreiss Research Corp (QEP)11.90%-51.44%1,000,000
Robinson-Langley Capital 11.75%-43.29%200,000
Molinero Capital -- Global Markets 11.46%-23.04%3,000,000
Revolution Capital -- Mosaic (QEP)11.27%-56.22%10,000,000

(Disclaimer: Past performance is not necessarily indicative of future results)

Diversification Sucks

With US Stocks pushing up to new all time highs once again this week, we’re seeing more talk of going with simple over complex, just doing the basic 60/40 portfolio, and so forth. We’re seeing more of the feeling – “Diversification Sucks!  I would be waaaaaaaay better if was just 100% long US Stocks… or even better, 150% or 250% long.”

We had some clever things to say on this topic, but found the following post out there by James Osborne of Bason Asset Management (from a few months ago) which said it much better:

[Read more…]

Alternative Links: Investor Greats

The Problem With Intuitive Investing – (A Wealth of Common Sense)

Follow-up: Will Warren Buffett Buy an Oil Company? – (The Reformed Broker)

Is Warren Buffett a closet technician? – (Midnight Trader)

Managed Futures:

Improving on the correlation benefits of managed futures – (Futures Magazine)

Managed Futures Performance – (Hedgeweek)

Are You Looking in the Right Place for Hedge Fund Returns? – (MoneyBeat)

JLN Managed Futures: CTAs begin 2015 with a stellar January – (JLN)

Asset Allocation:

Asset Allocation Intangibles – (A Wealth of Common Sense)

The Efficient Frontier Part 2 – (Attains Alternatives Blog)

Crude Oil:

Hedge Funds Turn Most Bullish on Brent Oil in Seven Months – (Bloomberg)

Get Ready for $10 Oil – (Bloomberg View)

Forex:

Leave currency trading to the professionals – (Knoxville News Sentinel)

The Efficient Frontier Part 2

Contrary to popular belief, The Efficient Frontier isn’t our attempt to write about Star Trek (we can only dream); it’s actually an investment/asset allocation concept put forth by those who believe in Modern Portfolio Theory. If you have no idea what we’re talking about, we covered the concept in depth last year which you can find here, and back in 2010, here. For those wondering how the curve has changed, let’s take a look.

The data from last year’s Efficient Frontier (Jan ’94- Dec ’13) is the purple line and this year’s (Jan. ’94 – Dec ‘ 14) is the blue line:

Updated Efficient Frontier

(Disclaimer: Past performance is not necessarily indicative of future results)
Data Stocks = S&P 500, Bonds = S&P/Citigroup International Treasury Bond Index EX-U.S Index,
Managed Futures = Dow Jones Credit Suisse Managed Futures Index

All around, last year’s returns moved the Efficient Frontier up and to the left, meaning, all portfolio’s increased returns while eliminating volatility (a win-win for everyone).  This year’s returns also lifted the (36/24/40) portfolio from 6.44% to 6.68%, while actually slightly decreasing volatility by 0.02%, proving once again to be the most optimum portfolio mix  (highest return with lowest volatility) over multiple investment environments in the past {past performance is not necessarily indicative of future results}.

The comparison of these two curves illustrate a unique situation in which Managed Futures was able to increase its returns without increasing its volatility. Some of that may have to do with the lackluster performance the years prior to 2014. Meaning, Managed Futures returns might have caught up to its volatility {past performance is not necessarily indicative of future results}. Meanwhile, the traditional 60/40 portfolio all but stayed the same.

We realize that tacking on a year of returns only offers a small lens of how each portfolio performs over time (even if this is looking at data over the past 20 years). Before the current never ending bull run that we’re now experiencing, the Managed Futures diversified portfolio continued to offer the most optimum portfolio mix. Additionally, a 100% allocation to Managed Futures used to offer the highest return with the highest volatility, while a simple stocks and bonds portfolio only offered the lowest return with medium volatility. You can see that chart posted by CME back in 2008, here {past performance is not necessarily indicative of future results}.

Finally, for the drawbacks of the efficient frontier chart. It’s as simple as risk doesn’t necessarily translate to just volatility. It’s the same issue that most have with the Sharpe Ratio, and doesn’t consider downside volatility and drawdown to name two…). Meaning, these types of charts and ratios treat volatility as a bad thing, when low volatility can be not so smart.