While the headlines and summaries of 2015 will focus on a flat year for stocks and rout in commodity markets – the year was anything but that simple. There was a rally in energy prices, as hard as that is to believe now. There were new highs in the stock market, punctuated by a sharp selloff in August, before a return higher. There were shocks in the Swiss Franc, Hog markets, and more. In short, it was a mixed bag of trends, reversals, and flat markets – making for a similarly mixed bag of performance across the various strategy types which make up the managed futures universe.
As an asset class, the industry performed at the break even mark, but that’s not to say Short Term Traders or Ag traders did the same. Investors and professionals alike (we’re guilty of it too) tend to lump the various strategy types together when referencing overall performance – but there’s so much more to the puzzle. For example, how Options traders respond to stock market volatility is certainly different from how Trend Followers may respond to the same market moves. The asset class is like all of our brains in that regard, with the different strategy types all part of the whole (the asset class brain, if you will), but the component strategies making up that whole responding to market action (what the body is saying to the brain) each in their own unique way.
In our annual tradition, to fully understand why and how the brain of Managed Futures performed in 2015, we must pull each one apart and analyze it separately (which sort of makes us think of the Steve Martin classic – the Man with Two Brains).
Trend Following:
2015 started as if we were going to see a continuation of the same trends of 2014 which drove double digit performance for trend followers and the asset class as a whole, with a strong dollar continuing into the new year driving the Newedge Trend Index’s gain of more than 5% after January 2015. But it’s never all that easy, and some tricky moves inside of bigger trends caused losses which ate away at the gains seen elsewhere.
You can look at Crude Oil down another -37% for the year, Corn down about -16%, or the US Dollar taking +7% for the year and argue there was more than enough movement from different markets to push trend followers into the black for the year.
But upon closer inspection you’ll see these weren’t classic down trends of the type trend followers prefer. Crude Oil was up on the year as late as July, for example; while Corn had a nasty little 24% rally in the middle of its year-long decline, successfully wiping out shorts and even causing some trend following programs to initiate longs which were quickly reversed themselves. And as for the mighty US Dollar which can really make the trend following engine hum , it peaked in March and never really did anything after that – staying in a rather tight range neither going up or down more than 4% to 6% for the rest of the year. And let’s not forget the Swiss, who shocked everyone by de-pegging their currency, causing it to move up 25% in a couple of hours – with up being against the predominant down trend (Dollar up) in the Swiss until that point.
Overall, it was a should of/could of type of year, where it sure seems like more trend followers should have made more money given the selloff in most commodity markets. They could have, if they allowed for larger variances within the trend (a risky proposition to be sure, as it equates to larger losses should the trend not snap back into form). They could have, if they were more exposed to commodity markets (a losing proposition up until this year as financials have driven profits for trend followers in the recent past). They could have, if they had a short bias (perhaps the riskiest of all propositions given nearly all markets long term positive bias).
In short, trend followers seem like they should have had a lay up year of easy gains based on commodities selling off. But to do so would have been against the grain (no pun intended). To do so would have required a program to be very dynamic in how they look at markets week to week/month to month or structured in a way where the gains this year were a trade-off for less gains in previous years.
Who performed the best amongst trend followers and stood out from the crowd? Register here to speak with an alternative investment specialist about the top performing Trend Following strategies of 2015.
Overall Performance: Below Average
Short Term:
The Short Term side of the Managed Futures brain reacts the same, yet differently from trend followers, much in the way you can remember what you had for lunch last Wednesday – but not what you for lunch on the first Wednesday of January in 1996. Short Term strategies need momentum and breakout moves just like their trend following brethren – but just on a shorter time frame. So they might see choppy back and forth market action as possibilities whereas trend followers see agony. Like a winding river that covers 10 miles on the river but has covered only 1 mile over ground – there’s an increased opportunity set for those taking the winding road versus traveling ‘as the crow flies’.
But just how much opportunity short term traders saw in 2015 depended greatly on their portfolio at three key moments during the year. The first was the Swiss Franc shock announcement, which was counter to the momentum trade already in place for some programs – causing losses, and was too quick for even short term traders to capture after the fact (and too risky based on the instant volatility). It was a tough year, generally speaking, for anyone on the wrong side of that move. The second was the stock market sell off and subsequent sharp “V shaped” rally in Aug/Sep. That move was really the catalyst for any gains in the short term space in 2015 – with those who correctly reacted to the downmove, and pivoted correctly to capture parts of the up move seeing annual gains, and those who weren’t able to navigate that winding river flat to down on the year. And finally – how much of any annual profit was retained in a very tough December (with a surprise announcement by the ECB and the long-awaited Fed announcement providing some false volatility) told the tale for short term programs.
Another interesting development was the return, so to speak, of the shortest of short term traders – day trading programs – in 2015. Day trading programs are governed by a simple rule – don’t hold any positions “overnight” – meaning their flat by the end of each day. This of course leads to a large increasing in trading frequency (as it would take many in and out trades to capture the same move a program which holds for weeks might capture) and requires a greater winning percentage. Several of the strategies we track outperformed their short term peers, begging the question of why? Perhaps because it filtered out any Europe or China based overnight moves? We’ll be keeping a keen eye on that in 2016, to be sure.
Who performed the best amongst short term program in 2015? Sign up now to go over the top performers in the short term category with an alternative investment specialist.
Overall Performance: Average
Multi-Strategy:
Multi-strategy as we define it within the managed futures space differs from the multi-strat hedge fund category that’s garnering a lot of assets recently. Multi-strat hedge funds typically employ multiple hedge fund strategies, such as long/short equity, merger arbitrage, equity market neutral, risk parity, and more – within a single fund. While multi-strat managed futures programs similarly spread their investments across many strategies, they limit those strategies to models working on exchange traded futures markets (so no credit lines or convertible bonds or the like).
Managed futures based Multi-strategy programs typically have a trend following base, with other noncorrelated strategies such as short term, mean reversion, or currency carry added to their portfolio of models to perform during flat to losing periods in trend following. Generally speaking; these strategies will usually do well, but underperform Trend following when Trend Following does well, and are designed to outperform when trend following is not. So, with trend following coming in below average in 2015, did multi-strategy deliver the goods via their other models?
Well, this is a bit of a disappearing category, with some managers returning to their trend following roots (at least marketing wise) while others prefer the Global Macro moniker of late. But of the select few we do track, it was an average year for them, delivering on some of that promise of holding up trend following when it’s not hitting those outlier gains. One of the common themes was losses and lack of opportunity in the carry trade acting as a drag on the overall multi-strat portfolios, while shorter term models and commodity focused trend following components drove positive performance.
Request our list of multi-strategy funds here.
Overall Performance: Average
Ag Traders:
Discretionary Ag Traders might be in line for the most disappointing strategy type for the second year in a row. All of the elements seemed to be there for good returns – the disruptions of El Nino, record supply, and prices making lower lows and lower highs. But instead of large gains for Ag Traders, we saw mostly down performance across this strategy type. There was a combination of reasons, starting with the sharp rally then subsequent drop in grain markets in June/July, and ending in “sympathy selling” among grain markets in combination with other commodity markets to close out the year. Looking back with 20/20 vision, it looked like an easy 2015 trade – just get short grains. But for these Ag Traders who are more concerned with feed lot numbers and crop yields than stochastics and oscillators – the charts always take a back seat to the market fundamentals as they see them. Problem is – when those fundamentals don’t line up with the charts, it can be hard to pull the trigger and get in line with what seemed like an easily identifiable down trend. There were long periods of inaction amongst programs in this category as managers believed discretion was the better part of valor, which in an odd twist of logic is almost more frustrating for investors than losses in their accounts.
One bright spot within the space was Ag traders who specialize in the meat markets – cattle and hogs (the infamous pork belly contract is no longer, unfortunately) – had a better go of it than their grain trader counterparts. And finally, the silver lining for these managers is that the natural phenomenon El Nino and its sister La Nina have the potential to wreak havoc on the Midwest growing season this summer depending on how it all plays out; if it’s the perfect storm (or perfect ocean temperature in this case) we could see some fireworks from the Ag space by this time next year.
See which Agriculture managers were able to come out on top on 2015, by signing up to speak with an alternative invesment specialist.
Overall Performancee: Disappointing
Options/Volatility Traders
2015 was the year volatility finally caught up with a handful of option selling programs who had seen nary a monthly loss in their 2009 to present track records, as a few popular option programs logged their first ever yearly loss. As we talk about in our yearly thanksgiving post, option trading can be like the Turkey, fattened up day after day for the Thanksgiving feast, only to come to a sudden and abrupt end when they become the feast. Option trading programs are of course designed to fare better than the turkey by being able to dynamically adjust positions when and if the thing they are betting against showing up at the party walks through the front door. But we hadn’t seen a move like the volatility spike in August (and subsequent snap back rally) in several years, which resulted in some high single-digit losses for many programs that month, and flat to negative performance for the year.
Now, to the option traders defense, it wasn’t catastrophic. There weren’t programs blowing out and blowing up. On the whole, the risk was rather well contained and option trading programs lived to fight another day. Finally, this space is starting to expand in a meaningful way with more and more programs coming across our desk investing in Vix futures– which are a derivative of a derivative. Vix futures provide a structural return (like the time decay of options) in addition to directional possibilities, and it will be interesting to watch traders expand into this market in the year ahead.
Speak with one of our alternative investment specialists about which Options programs made it to the top of the performance list in their category in 2015.
Overall Performance: Poor
Overall Summary:
Not to rub it in, but Managed Futures in 2015 felt a lot like the Chicago Cubs NLCS against the New York Mets, with a few missed opportunities. High off of their killer performance against the Cardinals (Managed Futures +24% in 2014), they struggled to perform with all-star pitching, left men on base, and made some simple fielding errors. If we have to nitpick – we could say this is much in the same way that Managed Futures weren’t able to turn another major down move in crude, a selloff in grains and other commodities, and a fading of the years long equity rally – into major profits for a second straight year.
Now, don’t get us wrong. As a whole, the asset class held up very well, finishing the year about flat with bonds and equities, while outpacing hedge funds by about 2.50% {Disclaimer: Past performance is not necessarily indicative of future results}. And just as the Cubs futures looks bright, so too might Managed Futures if the first two weeks of the year are any indication (they aren’t). The asset class is already up an estimated 3% after two volatile weeks of trading to open up the new year{Disclaimer: Past performance is not necessarily indicative of future results}.
Look for our Managed Futures 2016 Outlook coming soon, with a deeper look at the statistics behind the overall market environment in the year ahead. Sign Up to receive the 2016 Outlook and all of our other research and education here.
