Tuesday, January 3, 2017

Managed futures ends with positive month but disappoints many for the year

The SocGen CTA index generated positive returns for December, but this did not offset the disappointment with managed futures strategy since August. The index showed strong gains when the equity markets tanked during the first two months of the year. It also did well during the BREXIT period, but these two short periods could not offset the declines during the other months. Traders were not able to fully capitalize on bond sell-off in the second half of the year with their short positions. Bond sell-offs have generally been more difficult to trade than rallies. The post-election spike in US equities occurred just too quickly for traders to fully exploit. 

Given the swings in many markets, including reversals in both equities and bonds, a slightly negative year may seem reasonable. Nevertheless, the expectations for many investors who want to see gains in both up and down markets are much higher. Unfortunately, no strategy can do it all - be uncorrelated with equities and bonds, generate consistent performance, and exploit large market divergences. 

Perhaps there is a middle ground for what investors should expect from divergent strategies. Environments with trend reversals and large moves in the volatility of volatility are just not good for many systematic traders. Managed futures will do well will large price divergences but smaller price dislocations which swing back and forth will be less profitable. These lower returns are no different than the performance from buying options strangles where prices move back and forth between wide strikes. The net result is less than a move to one extreme or another.

We catalogue this performance but look to the future. 2017 is likely to see more extremes as the populism of 2016 has caused high expectations for policy changes. The potential swings between secular stagnation and a new economic optimism will likely create more trading opportunities for global macro and managed futures managers. 

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