Asset Class Scoreboard (where’d that stock loss go?)

The month’s Asset Class Scoreboard numbers is a perfect example of just how much noise is out there in the markets. If you were glued to your twitter feed in October, you may have been freaking out about the -5% drop, but someone who checks in monthly doesn’t even see it… October finished just fine for them after a somewhat rare stock market bounce.

And then there’s managed futures, which somehow amidst all the ‘trend following is dead’ commentary and articles about Paul Tudor Jones losing money – posted its third consecutive month of gains, and 6th out of the past 7 months, to find itself sitting in third place on our YTD scoreboard.  Of course, this is an index, not all managed futures programs are up. But just the same, it sure is nice to be around the upper tier for a while after spending most of the past few years towards the bottom.

PS – take a look at the buy and hold commodities trade, down double digits on the year as Crude Oil joined the commodity sell off in October, to join grains and metals which had done so in the month’s prior.

Table of Asset Class ScoreboardChart Asset Class Scoreboard(Disclaimer: past performance is not necessarily indicative of future results)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy Tracker ETF (QAI)
Commodities = iShares GSCI ETF (GSG); Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)

Alt Links: Word of the Week (Commodity Trading Advisor)

Managed Futures:

Bloomberg’s Word of the Week is a Commodity Trading Advisor – (Bloomberg TV)

Skip to 2:20 for Word of the Week

Managed Futures October Performance – (Attain’s Alternatives Blog)

Alts:

Alternative Strategies Gain Traction in College Endowments – (Think Advisor)

Futures & Miscellaneous

Kids Explain Futures Trading – (Wall Street Journal Video)

Pain in Trains Falls Mainly on Grain – (Wall Street Journal)

CBOE may cut VIX futures trading hours after glitches – (Reuters)

Liquid Alts:

Liquid alts get warning from SEC’s Norm Champ – (Investment News)

Are ‘Alternatives’ an Asset Class? Maybe Not. – (Wall Street Journal Blog)

Managed Futures October Performance

Managed Futures continues its strong performance the 2nd half of 2014, with three of the four indices we track posting almost identical returns for October, a positive 1.06% {past performance is not necessarily indicative of future results}.

But it wasn’t a smooth month of returns by any meanings. Trend Followers started off the month strong with continued trends in Long U.S Dollar, Short Metals, Short Crude Oil, and for some strategies, Long Stock Index futures. But as the Fed called for the end of QE, these trends appeared to be coming to an end, and it looked as though managed futures as an asset class was going to end down on the month, slightly. That was until on the last day of month, the Bank of Japan announced it was expanding monetary easing (QE) from 60 trillion up to 80 trillion yen ($720 Billion).

Most of us heard about this move by Japan sending stocks to all time highs, but it also helped these same markets (US Dollar, Crude, Metals) continue their trends, giving managed futures the boost it needed to end the month in the positive. But taking daily moving of markets in the lens of managed futures strategies doesn’t mean much. It’s the fact that those end of the month moves added on to or continued the trends that have been taking place for weeks or months.

We’ve already talked about why a trending (up or down) US dollar is good for managed futures, but more importantly this month’s performance, or rather, the past couple of months performance, is to show that Managed Futures strategies are non-correlated to the stock market. Meaning, that it’s just as likely to perform well when stocks are going up (like right now) as it is to perform well when stocks are moving lower like in 2008-2009 {past performance is not necessarily indicative of future results}.

Managed Futures October Performance(Disclaimer: Past performance is not necessarily indicative of future results)
(Note: Barclayhedge reporting 25% of funds)

With two months to go, we’re still not celebrating these returns just yet, as we’d love seeing the YTD performance run into the double digits. Here’s hoping.

Pursuing Portfolio Perfection

It’s 5 years into the one of the biggest stock market bull runs of all time, and all looks fine for the aging bull even after this brief downturn in October.  For many, this has been a great run and they’ve been doing quite well during it. For many others, it’s been rather annoying, as their “smart” choice of diversification has under performed recently.

But here’s the deal – it’s not about beating the S&P 500. You’re on the quest to find a portfolio that best matches your needs before retirement. For some, that’s so far in the future, you’re not worrying about volatility. For some, it’s within reach, and you want to protect what you have before something bad happens. For some, you’re looking for something in between the two. So what’s your “Perfect Portfolio?” It’s not an easy question to answer, and many pros have tried (check out Meb Faber’s impressive list of asset allocation strategies and stats here). The basic portfolios to consider in our mind are the following:

[Read more...]

Alternative Links: The Brothers that Cornered the Silver Market

He (almost) Cornered the Silver Market:

RIP: Nelson Bunker Hunt – (Crossing Wall Street)

Nelson Bunker Hunt, 88, Oil Tycoon With a Texas-Size Presence, Dies—(New York Times)

The Man Who Would Corner Silver – (Futures Magazine)

Trend Following:

Look Who Decided to Show Up to the Party… — (Meb Faber)

Diversification:

4 Year-end Portfolio Moves – (Huff Post Money)

Liquid Alts:

Market volatility gives liquid alts first real test – (Investment News)

Bloomberg mentions WDTI as stormy weather ETF – (Bloomberg)

Under the Hood: Wisdom  Trees Managed Futures ETF – (Attain’s Alternatives Blog)

Risk Adjusted Ratios:

Don’t Over Rely on Historical Data to Forecast Future Returns – (AAII)

LSE:

LSE to launch intra-day auction in 2015 – (Financial Times)

Best Managed Futures Programs – September

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).

 (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).

Top 10 CTA's of September
September ROR
Max DD
Min. Invst.
Purple Valley Capital - Diversified30.68%-49.34%1,000,000
Paramount Capital (QEP)28.14%-57.77%100,000
Hawksbill Capital - Global Diversified (QEP)20.81%-62.98%5,000,000
Southwest - Global Diversified 20.12%-32.79%200,000
Mulvaney Capital - Global Markets (QEP)17.69%-45.02%10,000,000
Westphal Trading - Diversified 16.53%-26.10%500,000
Tactical Investment Management -- Instl. Comm. (QEP)16.30%-41.51%10,000,000
Revolution Capital - Mosaic (QEP)16.05%-53.34%10,000,000
Covenant Capital - Aggressive 15.59%-20.41%50,000
Kelly Angle - Genesis (QEP)14.49%-45.59%2,000,000

5 Thoughts on the Stock Market’s -7.5% Correction

  1. Why is ANYONE surprised?

This has been the most hated rally of all time, as quoted by Barry Ritholtz, The Wall Street Journal, and CNBC; with seemingly many more people doubting its ability to survive than actually participating. What’s more, this thing was getting very long in the tooth – 68 months and 197% off the March 2009 lows as The middle of September, and 17 months since the credit crisis losses were erased with a new all time high in March 2013.  Compare that with an average bull market move of 103% and 30 months off the lows, and 18% and 14 months from new highs to the eventual peak, and you can see we were due. It’s also worth noting we’re basically flat on the year after this “correction”… no gains, no losses. While hard to believe after the past few years – the stock market does have losing years. Let’s repeat that:  In distant times (like ancient 2011), there were entire 12 month periods where stocks didn’t end higher than they started a whole year ago… Quelle Horreur!

S&P Bull Run 1 (Disclaimer: Past performance is not necessarily indicative of future results)
Data of S&p 500

  1. Short Bonds if you dare…

We’ve also been due for interest rates to rise, and a lot of smart people have bet a lot of money on that happening (including one Bill Gross, whose wrongness there no doubt led to his eventual exit from Pimco). But this is the new widowmaker trade. They are carrying people out in bodybags from this one, as every head fake lower in bonds results in violent upswings.  Despite us being 6 years past the credit crisis – when everyone though rates would be going back up by now, 30 yr US Bonds have dropped from around 4% to nearly 3% this year, with bond futures prices shooting up about 7.5% in the past 20 trading sessions. There’s some programs killing it on this trade, but there’s also a lot of pain and debris left over from bonds once again moving higher (rates lower).

  1. Managed Futures have been waiting for this…

September was great for managed futures, and we’ve been cheering stocks to zero so far in October, because this type of environment is what managed futures lives for. It’s been a quiet few years of waiting for a volatility expansion like this for managed futures strategies, most of which essentially bet on outlier moves like this one happening, not just in stocks, but in bonds and currencies, and the rest. The ability to be able to go long and short – combined with the ability to be in markets like bonds, wheat, and even stock indices – means these types of moves can be captured. Now, there are likely to be whipsaws and the potential for lower volatility ahead… just like the stock market, volatility can’t keep rising day after day; but every manager we talk to is very excited about this new market environment.

  1. This is why you diversify

If this type of market move scares you – remember this is why you diversify; even when that strategy has been getting it’s ass kicked the last 5 years. Those who are diverisified and missed out getting the full return delivered by stocks the past few years realized that diversification isn’t in place for what is going on today, but for what may come tomorrow (tomorrow is here). They realized that the choice to diversify can mean accepting smaller positive returns today in return for smaller negative returns tomorrow.  At the end of the day – this isn’t just about the final return – it is about the journey as well. It’s about avoiding the swamps… as the Abraham Lincoln quote in the movie Lincoln illustrates:

“A compass, I learnt when I was surveying, it’ll… it’ll point you True North from where you’re standing, but it’s got no advice about the swamps and dessert and chasm that you’ll encounter along the way. If in pursuit of your destination, you plunge ahead, heedless of obstacles, and achieve nothing more than to sink in a swamp… What’s the use of knowing True North?”

Just owning stocks and hoping the market goes up indefinitely is akin to just plowing straight ahead with your Compass pointing North. We’ve landed in stock market swamp… You going to go through it, or diversify your way around it?

  1. This is proving time for Liquid Alts

There’s been a huge influx of mutual funds offering hedge fund like strategies such as long/short equity and market neutral, as well as managed futures mutual funds and ETFs that have come to market since 2008. This is the first real proving ground for those products, and the volatility and stock market losses should really start to separate the proverbial wheat from the chaff. It will be quite interesting to see who delivered on their glossy brochure promises and who didn’t when the dust settles.