Managed futures strategies such as the $4 billion Campbell & Company are having an inspiring year. This was particularly evident during the third quarter, as Campbell’s flagship managed futures program returned 12.8 percent during the July through September period while stocks struggled over the same period.
As reported in ValueWalk, certain knowledgeable alternative investments analysts have observed that managed futures positive 2014 performance might not be a good thing for stock market investors.
Campbell, however, has a slightly different take on the situation. Many investors tend to focus specifically on the equity sector. However, the best opportunities in the third quarter were actually found elsewhere, the fund notes in an investor letter.
In April, Li Lu and Bruce Greenwald took part in a discussion at the 13th Annual Columbia China Business Conference. The value investor and professor discussed multiple topics, including the value investing philosophy and the qualities Li looks for when evaluating potential investments. Q3 2021 hedge fund letters, conferences and more How Value Investing Has Read More
Campbell gains from foreign exchange and commodities
For Campbell, its portfolio was profitable in all four market sectors, but the vast majority of gains came from foreign exchange and commodities. Foreign exchange exposure, where powerful trends were witnessed in most major currencies, accounted for the bulk of Campbell’s success, being a 7.6 percent contributor to overall quarterly performance. (Campbell is known to utilize sophisticated trend following methods but has also been said to incorporate a carry trade model in its strategy mix.) Commodities were the second largest contributor in the third quarter, accounting for 4.5 percent of positive performance. Bonds and equities, while contributors to performance, nonetheless trailed with 2.4 percent and 0.3 percent performance respectively.
In other words, while the strong trends lower in equity markets were helpful, it wasn’t the reason for the entirety of Campbell’s performance.
Campbell: The market environment is changing
Most investors are almost entirely focused on equities, and this has worked very well since 2009, if investors had the nerve to buy on the equity lows. Throughout this period of rising stock markets and sinking bond yields with little volatility investors enjoyed a virtual paradise, many say a gift from the US Federal Reserve and its historic quantitative easing program. While quantitative easing was largely given credit for abnormally smooth sailing for equity investors, its withdrawal from the market environment hasn’t been as much discussed. With QE set to expire and interest rates likely to rise, the market environment is changing, notes Campbell.
“With the turn in monetary policy cycle in the US and an increase in interest rates on the horizon, the prospects for performance in equity indices and fixed income are increasingly uncertain,” they wrote in the investor letter. “One way to diversify this risk is by ensuring that non-traditional asset classes are represented in a portfolio.”
Looking back on that last statement three to five years from now might be some of the most prophetic advice ever given to investors.