Managed Futures Set To Re-Emerge As Performance Leader?
Managed futures CTAs are posting gains in June as equity long / short program profitability sags, a recent Credit Suisse report notes. While CTAs, measured by the Credit Suisse Hedge Fund Index, are down -1.7% year to date, surrendering significant gains early in the year as predicted in ValueWalk, the Natixis ASG Managed Futures mutual fund is up 4.24% in the A shares year to date. Senior investment committee advisor Alistair Lowe sat down with ValueWalk to discuss the outperformance. He considers the mutual fund’s adaptive approach that reduced exposure in certain markets and their trade time horizons as key causation for the outperformance.
Credit Suisse notes long / short strategies rolling over due to long exposure
This month equity long / short funds are witnessing a “roll over” in performance that is in part due to the long end of the long / short ratio, the June 13 Credit Suisse Global Hedge Fund Bulletin observed. The Credit Suisse equity long / short index, which was down -3.2% month to date as of June, is running into headwinds this month due to underperforming tech, internet and retail long exposure.
This contrasts with systematic CTA strategies, who are once again finding strong market environments, particularly on a short term time horizon. After being down -2.8% in May basis Credit Suisse’s CTA/Futures index, the alternative investing category, bolstered by metals exposure, is currently up between 2% to 3% on the month, Credit Suisse’s Mark Connors estimated.
As a comparison benchmark, the SG Trend Index, designed to measure managed futures momentum beta, is up 2.55% month to date, but is also down -0.83% on the year. At the conclusion of February the index was up 6.2% and has fallen dramatically since.
Why the recent overperformance by CTAs? Currently macro and CTA funds are highly exposed to commodities, Connors notes, as precious metals such as gold, which has recovered recently, are boosting performance for those CTAs with long positions.
Natixis benefits from adaptive model and time horizon adjustments
Amid this market environment sits the Natixis ASG Managed Futures mutual fund. When considering outperformance of a trend-following market beta, which can be measured on several levels including the SG Trend Index, Lowe points to the fund’s diversification as key to success. This diversification not only takes place over time horizon, but there are numerous momentum-based models used to harness trend following beta and multiple risk management protocals. Determining risk exposure, for example, is done by an adaptive computer model that determines market environmental exposure and adjusts risk weightings.
It is this adaptive model that determined it was a high probability decision to turn the dial of time horizon to more significantly weight the short trade horizon while underweighting mid- and long-term momentum.
The fund, which is in the Societie Generale CTA Index of top 10 CTAs (SG CTA Index), is the creation of managed futures industry renowned MIT professor Andrew Lo, with whom Campbell’s Kathrine Kaminiski trained as well as Lowe.
There are differences and similarities in approach.
In an interview at the Morningstar Investment Conference in Chicago, Lowe said the adaptive model positioned the fund’s $3.5 billion in assets to increase exposure to fixed income while reducing stock exposure. The models also boosted exposure to certain currency crosses, particularly between the US dollar relative to both the Japanese Yen and Euro.
While Campbell is known to benefit from carry trades in the past, Lowe expresses concern, particularly at this moment in time. Campbell’s current position regarding carry trades is unknown. Natixis, for their part, does not include the carry trade in their portfolio of strategies, sticking with different variations of a momentum strategy with varying trigger points in addition to price average crosses. This includes scatter-plot regression analysis among other trigger points used to capture market beta.
Separate discretionary and algorithmic market analysis indicates an expectation for heightened market volatility, with the number of potential volatility trigger points increasing in regards to not only Brexit, but surrounding a Trump presidency, sovereign debt disruptions and core problems in Greece. Much as the decline of managed futures hedge funds in March was predicted, looking at logical algorithmic market dynamics and combining this with discretionary analysis that connects dots regarding news points that have not occurred in the past (an algorithmic formula weakness), the market environment that benefits certain managed futures strategies could return to positive, particularly between now and the inauguration of a new president, with the September to November period having a high propensity for volatility.
Short term strategies lead to success at Natixis
The Natixis fund’s heavy reliance on short term strategies is not only noteworthy at this moment in time from an algothrimic standpoint, but also in regards to discretionary analysis. Forthcoming volatility trigger points which logically could generate quick divergence from a pricing mean are known to exist. While Natixis is well diversified, it might also be prudent to add to exposure with certain relative value and volatility strategies.
Managed futures is known as a portfolio protector during periods of market stress, but there are certain market crisis that cannot be protected against. In discussing the potential for a future flash crash, Lowe differentiated between an immediate value readjustment, such as what took place during the Swiss franc flash crash, and flash crashes that have potential for algorithims to catch micro time frame moves. Certain managed futures funds are known to have risk management models that work to detect high frequency market disruptions, but Lowe would not reveal the exact strategy details nor would he discuss the adaptive model and its specific trigger points for recognizing market environment and entering a trade position.
With a potential currency risk seen in carry trades, which “pick up nickels” but could be exposed to significant risk in the future as was witnessed when the Swiss currency broke its currency peg to the euro, Lowe said increasingly such currency pegs could be subject to risk as a negative interest rate environment takes hold. The Saudi currency is pegged to the dollar, as is China’s currency along with numerous currencies from smaller economies. A larger currency peg to consider is the US dollar peg as used in world trade, particularly in light of how the IMF SDR basket is emerging, a point previously reported in ValueWalk and noted by other currency analysts.
Note: The author of this article is Mark Melin. Mark is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment.
Category: Precious Metals
