For the first time in the 33-year history of the Barclay CTA Index, the index produced back-to-back negative years. In fact the –1.65% return for 2012 is its second worst performance following its worst, –3.09%, in 2011. What made 2012 so difficult? There was the usual lack of trends and choppy markets, plus fear that a news event or government announcement could change the course of markets at any time.
Making 2012 more difficult is that it came on the heels of the worst year ever for managed futures. However, some niche managers did well. The Barclays Agricultural Traders Index returned 5.29% thanks in large part to this past summer’s drought, and the Currency Traders Index returned 1.71%. These sectors skewed the numbers upward while the core Diversified Traders Index was down 4%.
Sol Waksman, president of CTA database BarclayHedge, cites several factors for recent poor performance, but the biggest is pretty obvious. “When you look at various sectors — ags, energies, currencies, stock indexes — there have not been large trends the last two years,” he says.
In addition to that, markets have been whipsawed by greater government and central bank interventions and a tendency toward risk-on/risk-off trading that has caused many sectors to correlate more than normal.
“Now the dollar goes down and commodities go up, interest rates go up, stock indexes go up. When it switches to risk-off, it is the opposite. The four major sectors all are correlated,” Waksman says.
Greater correlation adds risk and the drivers of risk-on/risk-off often have been political announcements that were uncertain and frequent. “[An] announcement can switch us from risk-on to risk-off in an instant, which makes for a very choppy market with few sustained trends. These types of fundamental moves cannot be modeled,” Waksman says. “How do you trade that? With difficulty.”
Despite all that, some managers did well in 2012, which could be attributed to a greater variety of strategies.
Managed futures, like other asset classes, have better and worse environments, and 2012 was not a great climate for them, especially for the most common strategy: Medium- to long-term trend-following. But at their core, managed futures represent a group of absolute return strategies and attempt to earn profits in all market environments; many managers do, regardless of strategy.
There is a tendency in investment circles to try to benchmark every conceivable strategy, define it and place a value on it. But trend-following is not nearly as homogenous as, say, the average long-biased hedge fund or the numerous convergent arbitrage strategies.
Long equity funds are expected to match the S&P 500 returns and are considered successful in years they lose less than their benchmark index. Various convergent arbitrage strategies adhere to a belief in normal distributions and can see ugly drawdowns when markets prove to be inefficient.
However, trend-following strategies vary in length and methods, and those involved often use the term as a catchall for a variety of diversified approaches to finding value in futures markets. These mad quantitative scientists create a multiple of approaches that often are unique.
Clarke Capital Management has been trading numerous trend-following type strategies since 1996, and performed extremely well in 2012. Its Global Magnum Program returned 53.32% in 2012 and five of Clarke’s seven programs earned double-digit returns (see profile above).
Clarke President Chad Butler says the strong returns show the robustness of their models. Butler says the performance is proof that managed futures are a good non-correlated asset class. It earned strong returns in currencies and interest rates in the first quarter, particularly March.
Butler attributes much of Clarke’s success to filters that pull out potentially unprofitable trades. That selectivity is a theme for the few trend-following managers that performed well in 2012. (see “Briarwood: Nothing odd about success,” page 46).
RAM Management Group is another CTA that loosely falls into the trend-following space that not only survived 2012, but thrived. Its Aggressive Program earned 28.25% for the year.
RAM Principal Jeff Earle says they performed well in 2012 “by being very selective in our trades. We found that there were several short- to medium-term trends.”
When the dollar rallied sharply in the spring, RAM pinpointed the yen in March and the Aussie dollar in May to post double-digit profits each month. “We allocated units to the weakest currencies,” Earle says. They also caught the early move in soybeans. “What makes us different is our selectivity; we are often flat and our time frame is shorter,” he adds.
RAM’s performance is a testament to their skill in model building and execution — RAM Chairman Bob Moss executed trades for Richard Dennis in the 1980s — but also illustrates the variety across the managed futures world even for those who fall under the broad definition of trend-following.
Both RAM and Clarke employ some countertrend elements in their approaches as well as robust risk management, but having unique qualitative elements is shared across the managed futures space.