Quality Capital Management (QCM), a leading London-based managed futures hedge fund, posted a strong February performance, bucking the industry trend. The hedge fund currently manages

QCM up while BarclayHedge BTop 50 down

QCM’s Global Diversified Program was up 2.26% in February while the benchmark BarclayHedge BTop 50 index, which measures the largest managed futures funds, was down -0.18 over the same period.  The firm has had only four negative years since its founding in December of 1995.

Long equities

QCM benefited from a long equities position in February.  “QCM profited in February as investors viewed some lackluster economic data as largely a result of the unseasonably cold weather gripping the US. Political upheaval in the Ukraine raised concerns that, without foreign assistance, the country will either default on its debt or devalue its currency,” an investor letter reviewed by ValueWalk said. “Nevertheless, a long commitment to equities was rewarded as investors remained hopeful that the economic pickup remains intact.”

QCM market exposure

In addition to long equities, the algorithmic trader, who primarily trades regulated derivatives contracts, was significantly exposed to the yield curve and currencies with agricultural exposure lagging the list.

Stocks and commodities attributed for success

In terms of performance attribution, it was the stock indexes followed by the commodity markets that generated profits, while the whipsawed yield curve was more difficult to master.  “Amongst natural resource markets, exposure to the energy sector was profitably increased amid a combination of inventory and cold weather concerns,” the report said.

The report continued, “Natural Gas positions profited after inventory data showed its biggest decline since 2007; however some conflicting weather reports diluted gains. Exposure to precious metals was increased as economic data underwhelmed and geopolitical issues in the Ukraine, Venezuela and Egypt buoyed the market. Long industrial metal positions remain modest. Signs that demand for US supplies of Corn had increased, coupled with the dry conditions that have hurt Soybean crops buoyed grain markets. Long Arabica Coffee and Sugar positions generated profits as the worst droughts in decades hit Brazil.”

Downside volatility control

QCM is known for its downside volatility control algorithm.  In managed futures the treatment of downside volatility as having a higher degree of risk than upside volatility is common, a concept that runs against the Nobel Prize winning theory of Harry Markowitz.  The fund’s financial market exposure was the most troublesome in the month.

“Despite some disappointing macro data, yields climbed amid signs of stabilization in emerging markets,” the report said. “Fed minutes revealed only a major deterioration in economic conditions would prompt the bank into slowing its reduction in asset purchases. Long British Pound exposure profited after the Bank of England raised growth forecasts while hinting that it may raise interest rates next year. Short South African Rand positions incurred losses after a surprisingly upbeat growth report buoyed the Rand.”