The managed futures world had a huge comeback year in 2014, with the Barclay CTA Index returning 7.62% and the Barclay BTOP50 Index earning 12.36%.
Last month we talked about some of the innovations we have seen in the space but innovation only works when investors see value. All the innovation in the world is not going to draw customers without proven performance.
Performance returned in a big way for commodity trading advisors in 2014: Volatility returned to the currency sector, and big moves in energy and interest rates allowed managers to hop on trends. As we highlight in “Trends are back,” for managed futures to be successful, there must be trends to exploit. In reality, there have been trends in recent years, but also some nervous and correlated markets that tended to whipsaw based on central bank activity.
The year was similar to 2008 in that it was a layup for most long-term trend followers. While every year is different, the long sustained trends in multiple sectors in 2014 were ideal for the heart of the CTA world: Long-term trend-following. We managed to profile three generations of trend followers who each have a unique perspective.
Bill Dreiss is an innovator and one of the early adopters in the use of computers. He started his first commodity trading advisor prior to the CTA designation. His CTA was grandfathered in. Dreiss owned one of the first assembled personal computers in the mid-1970s, an Altair. Bill Gates wrote the operating system.
Salem Abraham, another multiple-top trader, has altered his approach to that of a multi-strategy trader but still managed to catch the big trends of 2014.
Finally, youth is served as we talk with Donald Wieczorek, founder of Purple Valley Capital. We learned that Abraham was somewhat of a hero of Donald’s for building trading strategies while still in school. Oddly, it is Wieczorek, the youngest of the group, that is most aligned to the classic trend-following approach.
Dreiss began trading before financial futures and the broad use of computers; Wieczorek only knows electronic trading. While most young investment managers are looking for a new niche, Wieczorek saw the value in cutting losers short and letting winners run. He also managed to produce positive returns through some of the most difficult periods for trend followers, which bodes well for his potential longevity.
Most of the CTAs we spoke to did not see any particular magic in 2014, just a return of trends thanks a great deal to a less active Federal Reserve and a general divergence in global central bank activity. It had been a tough few years for trend followers prior to 2014 as they often get tagged with being too volatile. There is a lot of misperception surrounding volatility. First off it was a lack of volatility that most likely harmed trend followers from 2011-2013, particularly in currency markets.
Jaime Toplin takes a look at Volatility in “VIX is coming of age,” where she provides a little history on the creation of the CBOE Volatility Index and introduces new products to keep an eye on. Volatility is quickly becoming as asset class of its own. It will be interesting to see how the space evolves.
End of an era
In early February, CME Group announced that it would be closing nearly all of its open outcry futures trading pits. The announcement was not really a surprise, but still upset those folks that continue to make a living on the floor. It is one of those things that, although we all knew was coming, still shakes you up a bit.
For the last couple of years I have been going on to the floor to record short videos at the CME Group studio above the financial floor. I enjoy going down there and chatting with old friends that have managed to hang on despite dwindling opportunities. Some are clerks entering most orders electronically and some are brokers that trade mainly online but enjoy the daily interaction with colleagues on the floor.
While the trading floor is no longer a place where market price is discovered, it still serves as a clearinghouse of information. Many of the folks who maintain a desk on the floor do not have to, but enjoy the daily interaction with the markets, the price boards and the people. If, as CME Group noted, the move does not create a great deal of savings but is based on where trading occurs, the exchange may want to re-think its value before taking that final step.
CME Group is not closing the floor entirely. They will maintain a floor presence in the S&P 500 futures and in most options pits. We have commented on the move and have asked former floor traders to share some interesting anecdotes and stories from the floor (check out our website for “Tales from the pits”).
While the trading floor era is over, making the final call and ending the 167-year history of floor trading in Chicago will be a delicate maneuver for CME Group. It is where many people learned about the markets and trading. Not just members; but brokers, trade checkers, compliance people and many folks who have gone on to leadership positions in all aspects of the industry.
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