Wednesday, June 29, 2016

Managed futures and BREXIT - Divergent trading worked

June is not over but there are some growing positive reports on the performance of managed futures during the BREXIT event. The dispersion of returns exploded over the last few days but the general direction has been significantly up after giving back earlier gains. 

We track a set of liquid managed futures funds, currently fifteen, as a way to measure intra-month performance. This portfolio includes the largest and most well-known as well as some managed futures multi-manger funds. We think there are advantages with seeing the dispersion of returns across managers and not just the median. The first graph shows the high, low, and median fund performance while the second shows the daily NAV's for each fund for the month of June through yesterday. 

What is most interesting about the intra-month performance is that it was significantly up by mid month during the period of market uncertainty only to see almost all of the gains given back just before the BREXIT event. This was the period when equity markets gained under view that the remain vote was likely to prevail. Upon the BREXIT vote announcement, managed futures fund performance exploded on the upside. This return profile suggests that managers had significant long fixed income and "safe" currency exposure and were either light or able to cover losing global equity positions quickly. Nevertheless, a review of the return dispersion suggests that all managed futures managers are not alike. There were clear winners and others who needed to dig out of performance holes.  

Most of the managers followed in our tracking portfolio are trend-followers. Many would like to say these managers were insightful market traders, but in fact, trend-followers are signal extractors from market prices. There may not have been any special insights other than being long markets trending up and short those going down with sizing related to market volatility. In reality, their distinct advantage is not trying to over-think the market but follow the direction of market sentiment embedded in prices. They are able to profit from divergent prices because they focus on those price events. As regularly said, prices are primal and should be the basis for core decision-making. 

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