It is no surprise that commodity trading advisors (CTA) had a tougher go in 2009 after what arguably was their best year ever in 2008, especially when measured against all other alternatives. But putting a finger on exactly why some managers did better than others is a little more difficult.
While it was a bad year for trend followers in general, several did well, and while some managers define themselves more for marketing purposes, it seems there are always trend followers who do well. It would be too time consuming for us to apply some sort of purity test to trend followers and absent that, we have to conclude that there is much greater diversification in the space than many give it credit for.
Based on conversations with numerous managers, traders who are extremely long term did better in 2009, as did those who allowed themselves some discretion. The Barclay Discretionary Traders Index was up 2.16%, while its Systematic Traders Index dropped 3.3%.
John Hummel, principal of AIS Futures Management, describes his program as trend following, but it is discretionary and very long term, which worked in his favor. His 2X-4X program returned 64.31% and his 3X-6X program returned 97.26%. He stayed in for the long haul, meaning he didn’t catch the 2008 mid-year reversals but was able to avoid the chop of 2009. His programs have been long gold off and on since the market turned in 2000.
It was a year of unprecedented intervention, or at least proposed intervention, by government into markets. Several managers cited the Federal Reserve’s quantitative easing decision as a major factor of market activity.
“The political situation is fragile,” says Stanley Haar, whose discretionary agriculture program dropped a few percentage points. Haar, who trades off of fundamentals, was hurt by interventions that tilted the dollar/ag balance.
The Barclay CTA Index was down (-0.1%) for only the fourth time in its 30-year history. The index was down in the first quarter as numerous downward trends reversed course and it was down in the fourth quarter, specifically December, when the dollar reversed.
Oddly enough, concerns over sector correlation may have prevented even worse returns. Last year many managers noted that they had reduced position sizing as positive returns mounted and it became apparent many markets and market sectors had become highly correlated. And while most CTAs underperformed in 2009, you didn’t see the type of negative returns in managed futures in 2009 that you saw in mutual funds and hedge funds in 2008, which may be due to managers being more cautious.
Jay Feuerstein, principal of 2100 Xenon, believes this may have helped keep losses down. Feuerstein dropped 7.56% in his managed futures program and attributed the tough conditions to choppy markets and the Fed’s quantitative easing. When asked about the difficult conditions, Feuerstein simply produced a daily bund chart, which illustrated extremely choppy conditions. “Choppy markets hurt our mean reverting trades,” he says.
And it wasn’t just fixed income markets, but grains and energies that produced a lot of chop. Perhaps trends in metals, currencies and equity indexes could have offset the choppy markets if it weren’t for the sharp reversals at the beginning and end of the year.
While the negative correlation of the dollar to almost everything caused some managers to be cautious, it provided opportunities for others. Discretionary trader Michael Frischmeyer noticed that traditionally non-correlated positions showed negative correlation and was able to treat them as a hedge. “Because I recognized the markets all ebb and flow together, I loosened my risk management a bit and allowed my positions to move adversely because I recognized the counterbalanced positions. I wasn’t kicked out of positions as quickly, so it prevented me from being chopped up as much as if I carried normal stops,” Frischmeyer says. His discretionary program returned 42.09% in 2009.
Niche managers did a little better as currency markets offered long-term trends against the dollar and equity indexes had an impressive rally following the March lows. Several extremely long-term traders produced solid returns by riding out the chop and avoiding the whipsaws.
Becker Asset Management made 39.59% in 2009. They trade a traditional trend following strategy along with a short-term counter trend strategy. Oddly enough, Becker earned more profits in its traditional trend following model. “We trade all the liquid U.S. futures markets except for energies,” says John D. Becker. “We had money in currencies, interest rates, grains, gold and silver. There was not one home run. Profits were kind of spread out.”
And while there appear to be quality short-term traders who have emerged in recent years, the best performers aren’t coming from their ranks. One exception is Quantitative Investment Management (QIM), which produced a 31.81% return in its X3 program and seems to make money in all market conditions. QIM earned nearly all of its profits in equity indexes but managed to tread water in most other sectors despite taking a hit when the Fed announced its quantitative easing policy. “We [had a big drawdown] as the quantitative easing was announced,” says QIM Principal Michael Geismar. “Government manipulation is not a good thing.”
Pixley Capital Management produced returns of 32.98% with its short-term countertrend system. Pixley holds trades a couple days at a time and concentrates on stock indexes and currencies. While they are short-term and countertrend, their success may be most attributable to trading in the two sectors that offered the best long-term trends in 2009.
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In 2008, it was easy to know who did well. If you followed trends, you did well. Last year’s successful managers were an eclectic mix of niche managers, extreme long-term traders, short-term traders in the right sectors and discretionary traders who chose well. It demonstrated the growing diversity in managed futures.
When analyzing managers, we have learned that it is sometimes better to look at how they handle tough market conditions — how much they lose in reversals for example — than their returns when the market winds are at their backs. And while 2009 was a tough year for most CTAs for some obvious reasons (choppy markets) and some not so foreseeable actions (quantitative easing), the drawdowns for most managers were reasonable, particularly given the returns of the previous year.
Most managers we spoke with expect 2010 to be a better year, and it certainly could be, but there also is a good chance that unforeseen factors will again work against traders as the fallout of our economic crisis is far from over. But CTAs have always been a good play when large market dislocations occur, so chances are they hold the best potential for providing a hedge against the unforeseeable turns that undoubtedly will come as we work through the most severe economic crisis in several generations.