What a difference a year makes… After three lackluster years of investors treading water with Managed Futures – 2014 finally saw some of the outlier moves needed for the asset class to thrive. We’re talking likely gains of around 15.57% for the Newedge CTA Index, in a year where stocks continued to climb, proving once again that the asset class is non-correlated to the stock market, not negatively correlated.

In our annual end of year tradition, we take a moment to dig a little deeper into the overall asset class performance number and give some color on the different types of strategies which make up the managed futures asset class (no… it isn’t all trend following). Without further ado, our 2014 Review of the Strategies that comprise Managed Futures:

Trend Following:

If we had to give a managed futures strategy MVP on the year, it would absolutely be Trend Following. Trend Followers had a year to remember – after several long years to forget… but the journey wasn’t a cakewalk.

After the first quarter, the Newedge Trend Index was down almost -6% on the year {past performance is not necessarily indicative of future results}, and it appeared as if the choppy markets of 2013 were here to stay in 2014. That’s not to say the first half of the year was all bad. There were notable trends, including up trends in Coffee, Natural Gas, and Cattle. Thanks in part to extreme drought in Brazil and parts of Asia, the coffee market was up 100% on the year at one point, and some trend followers we track were able to get in on the move. Over in the energy markets, natural gas experienced multiple volatile environments, with many blaming the “Polar Vortex” in the Midwest.

But these trends were insignificant in comparison to the action in the second half of the year, and especially the fourth quarter, where the big sell offs in energy markets, metals, and foreign currencies fueled one of the best quarters for trend followers in years.

The selloff in foreign currencies was especially important, as that meant an upward trending US Dollar, which is like profit oxygen for trend followers. The US Dollar Index’s +13% move in the last 6 months of the year was a heck of a move in its own right – and many trend followers were long US Dollar Index futures – but it represents so much more than that. It means multiple currency markets are trending as well, and a trending Dollar can actually affect non currency markets as well. Remember that all those Gold, Corn, Oil, Cotton and other commodities are priced in US Dollars – so all else being equal – a rising US Dollar means a falling commodity priced in US Dollars. As we said in a September blog post, “a trending US Dollar is one of THE best environments around for managed futures, at about 3.5 times the monthly return of periods when the US Dollar isn’t trending.”

Firms such as EMC (of turtle trader fame) and Covenant Capital (manager of our Trend Following Fund) were able to capitalize off this dollar move, as well as many others, posting estimated returns of +25% for the EMC Classic program and +29% for the Covenant Aggressive program.

How did they do it? Take the move in Energy markets such as Crude Oil (-49%), Gasoline (-52%), and Heating Oil (-38%); which are almost inconceivable when you look back on it {past performance is not necessarily indicative of future results}. How could these markets, which account for the economies of whole countries like Russia and whole regions like the Middle East, which hundreds of billions of corporate revenues are based on, and which are traded by professional speculators, producers, and big commodity players day in and day out; lose over half their value in just six months? How could millions of people involved in Oil’s discovery, production, refining, accounting, drilling, transport, etc, etc. etc – not be waving warning flags back in June that prices were about 2x too high. How could hedge fund titans like John Paulson who correctly bet on the housing collapse in 2008 not foresee such a move in a market like Crude Oil when much smaller players were able to?

We don’t know the answer to those questions – but we do know that this is what trend following is designed to do. It is designed to participate in the unforeseen… How? It isn’t magic. They participate in the move nobody saw coming by participating in all the moves that didn’t happen before that. They participate in the Coffee and Crude Oil move, not because they knew that is where trends would happen; but because they are active in dozens of global markets to make sure they’re in the next market to make a big move.

As John Krautsack of EMC Capital puts it:

“A great deal of discipline is required in order for a manager to successfully navigate different market environments. Consider that the most difficult sectors in 2013 turned out to be our best sectors in 2014. Our systematic strategy eliminates the natural instincts of wanting to change risk weightings in systems, markets, and sectors in reaction to poor market environments, resulting in an odd circumstance where some of the most difficult trades to put on turn out to be the best trades. The global bond market has proven this over the past few years.”

Overall Performance: Excellent

Short Term Trading:

Now here’s where things get confusing. Because despite low correlation to trend following, the very same expansion in market volatility and sustained trends that helped trend followers were also good to short term traders in 2014. Short Term traders saw big gains later in the year off of short grain trends, long cattle positions, short Sugar, and the Energy markets.

How? Think of it like a movie – with the trend followers needing the whole movie to have good scene after good scene strung together without interruption, while short term traders only needing a few scenes to be good, not caring if they are one after the other or separated by a lot of interruptions. But if the whole movie is indeed good, then the short term traders have that many more chances to grab the short bits of good scenes.

Now, there are different types of short term traders, and we found that the Short Term managers we follow with allocations to a diverse number of markets were able to capitalize off sustained trends, while other short term traders who only allocate to stocks and bonds had little performance to speak of.

One notable exception to the good performance was short term bellwether QIM, which was at -8.74% through Nov.; as compared to eco Capital management, manager of our Short Term Alpha Fund with returns of 7.08% for the year through the same period (and +8.64% for the full year).

Performance: Good


Multi-strategy programs typically have a trend following base, with other non correlated strategies (such as short term) added to their portfolio of models to perform during flat to losing periods in trend following. Generally speaking; these strategies will usually do well,

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