Often the most obvious answer is the correct one and 2014 simply was a great year for managed futures because there were multiple trends.
A long period of low volatility had come to an end that year, particularly in currency markets. “Historically, currencies have been one of the leading sectors that drove performance for trend-followers so when we lost those markets that was one of the reasons we struggled,” says Wieczorek . “Finally we are getting some dichotomy in central bank policy. The Fed is about to hike, the euro is pressing [and] the Central Bank of Japan is trying to destroy its currency. It is really awesome; it causes these huge explosions because of all this pent up pressure.”
Currencies were the top performing sector for most managers along with energies, meats and interest rates. “We really kicked it into gear being long the dollar,” says Levitt. “At times we were completely long the dollar or short [other] currencies. [We caught] the yen and euro moves.”
The best sectors were currencies, energies and bonds,” says Bergin. “Energies early in the year, currencies late in the year and bonds throughout.”
It was similar for Abraham Trading Company. “Currency markets did well, interest rates did well, we made money in grains, it was pretty evenly distributed,” says Salem Abraham.
Wieczorek adds, “Markets are trending again, which will create a lot of opportunities for trend-followers. Rising prices attract buyers and falling prices attract sellers. Trends will exist.”
While Waksman acknowledges that trend-followers have good and bad years without Fed activity, he adds, “When somebody at the [European Central Bank] makes an announcement, and in two minutes it is everywhere, then all major market sectors are moving in lock step—some up, some down—that is a much more difficult situation.”
Clearly the risk-on/risk-off nature of markets reacting to central bank policy had a negative effect on trend-following. One only needs to look at how the prospect of tapering roiled the bond and equity markets in the summer of 2013. That massive move was in reaction to a methodical process that would not begin for another six months.
The key to Waksman’s point is, “in lock step.”
“It wasn’t so much the volatility coming back into the markets as the de-correlation of the markets,” Bergin says. “For a number of years the markets were all trading in lock step. Equities traded the same, bonds, the energies. Even across markets it was long bonds, short everything else. That is where everyone was sitting for four years.”
But in 2014 that correlation broke down.
“Each of these individual markets are focusing on their own set of fundamentals [which is encouraging]; typically that is a supply-side equation not a demand- side of the situation,” Abraham says. “At some point the supply side matters too. We are starting to get markets moving and uncertainty and that always makes for interesting [trading].”
“We entered into a period where the markets became relatively uncorrelated,” Dreiss adds. “As you know they have been fairly highly correlated for many years. We got out of that and that helped in terms of volatility. That is what was remarkable. I had 11 straight months, 13 straight weeks, where I was up, which is highly unusual. Usually, I will have more variability in returns.”