Managed Futures v. Bill Gross

Whether or not Bill Gross is actually short US treasuries in his flagship PIMCO program is up for debate. He said no on CNBC, but one of our favorite bloggers, ZeroHedge, essentially called him out- saying, No, you are short. But whatever side you take on that battle of semantics, Mr. Gross has made no secret of his worries about the massive US debt and deficits leading to lower prices in US Treasuries. By all accounts, it doesn’t look like Mr. Gross thinks the next leg in bonds will be UP.

But a funny thing has happened in the last few weeks while this debate has been playing out and silver and crude retreated from their highs. While everyone bemoaned their long-only ETF investments (don’t say we didn’t warn you), another trend began to emerge elsewhere…. In bonds.

Turns out, for all his grandstanding, Gross appears to be incorrect (for now). Bonds have not been going down under the burden of cumbersome U.S. debt. In fact, the current trend is decidedly UP.

How far up? The 30 year bonds have gained 5.33% since April lows, while 10 year notes are up 3.75%. Remember, bond prices move inversely of the rates, so rates moving lower means prices have moved higher.

Gross may be missing out on this bond action, but many of the managed futures programs we track have identified and are participating in the trend. Programs we track which are holding long bond positions include 2100 Xenon Fixed Income, Accela Capital Global Short Term, Auctos Capital Global, Blue Fin, Clarke Global Magnum, Clarke Worldwide, Covenant Aggressive, Futures Truth Sam 1010, Integrated Global Concentrated, James River Capital Navigator, and Robinson Langley.

Are we surprised? Not really- managed futures programs tend to love trending bond markets. And this is how systematic managed futures programs are supposed to work. They don’t care how much debt the US has or if the largest bond investor in the world is betting against the up trend. They ignore all of that noise, and merely identify and react. Identify, react, repeat. Identify, react, repeat.

So, while the rest of the world was looking the other way, many managed futures identified a new up trend in bonds and reacted to it – putting on long positions. These programs are all in a position to have added to their P/L this month, but will it be enough? The same price correction that distracted us from Gross’ prosthelytizing also decimated returns for many programs caught off guard by the departure from the trend. While the bond market may help even things out some, it may not be enough to bring some programs into the black for the month of May.

Moving forward, we’ve got an epic battle on our hands. On one hand is managed futures, riding a technical trend higher and ignoring the doomsday financial prophets. On the other hand, bond king Bill Gross is betting that fundamentals will eventually crash US bond prices and interests rates inevitably climb, and is biding his time on the matter. Managed futures is winning this round, but who will win out in the end?

We certainly wouldn’t mind seeing Mr. Gross on the same side as managed futures next time (that’s a lot of fire power), but that will likely have to wait until this trend runs its course and bond prices start heading lower.

Look Out Below…

Just as managed futures were starting to gain back some steam (see week in review here) with “risk on” long positions in energies, metals, stock indices, and currencies;  Goldman Sachs goes and messes everything up with comments that they are exiting their long commodity trade…. (sure would be nice to be their prop desk and trade ahead of their comments, as there is no ‘insider trading’ in commodities)

We’re seeing losses almost across the board, with wheat, corn, palladium, soybeans, soybean oil and crude oil leading the charge downward, and only flight to quality instruments (plus pork bellies and cocoa, oddly enough, positive on the day) higher. None quite closed limit down, though corn played with the idea several times before rallying back.

We’ve been wondering when a correction would come to surging commodity prices for awhile now (check out our most recent post on it here), and continue to believe that an extended sell off for commodities would be good for managed futures.

But for now, the slump seems to have caught the bulk of the programs we follow off guard, with most either retaining some of the long positions they had before the March sell off, or new long positions entered into on the subsequent rebound off the March lows.

Of the CTAs we follow, spread trader Emil Van Essen is short back dated corn and crude spreads; systematic multi-market program Blue Fin Capital is short crude; and short-term multi-market Accela Short term is short wheat… and that’s it. You can be sure they’re hoping the correction sticks around long enough to be of benefit to them.

4/12/2011 Futures Performance via Finviz