Q3 Was Good for Stocks, and Managed Futures. Now in Q4…

 

The S&P500 TR Index was up 11.3% for the quarter ended Sept. 30, and is now in positive territory by 4.2% for the year to date through Sept. 30. It was a volatile summer that ended with a positive skew, driven by ongoing shifts in investor sentiment about future earnings, economic growth forecasts, and prospects of the Fed returning as a buyer to debt markets. The monthly return profile amplifies the point. July through September delivered monthly returns of +7.0%, -4.5% and +8.9%, respectively, in the S&P500 TR. 

Managed futures have often been viewed as negatively correlated to the stock market, meaning that if stocks are up, managed futures investments should be down.  Historically, however, over extended periods of time, managed futures have exhibited a low-to-non-correlation with stocks.  This means that historically there has been no significant statistical relationship between the two return streams over the long-term, and therefore you should not necessarily have any definitive expectation about managed futures performance when using stock market index performance as your benchmark. 

Consistent with that historic non-correlated outcome, the Altegris 40 Index was up 4.7% for Q3 and is up 6.5% year to date.  To hammer home the point, monthly returns for managed futures (as measured by the Altegris 40) during the third quarter were -1.3%, +4.1% and +1.9% (July through September). Of course, past performance is not indicative of future results.

(See my original AdvisorOne blog posting for an explanation of managed futures in general and of the Altegris 40 index in particular.)

So what worked in managed futures in Q3?

 

Trend-following managers represent approximately 75% of the Altegris 40 Index and in Q3 we saw the continuation of several strong trends in global markets.   

Global fixed income markets continued to rally (up in price, down in yield) as the reality of slower growth and concern about deflation risks outweighed the inflation fears that were prevalent at the beginning of 2010.  The likely return of Quantitative Easing (QE2), aka printing money, drove yields lower on the scarcity argument, although it felt a little counter-intuitive in my opinion. Meanwhile, the precious metals markets, in particular gold but also silver and platinum, were supported by QE2 and the relative weakness of the U.S. dollar in global currency markets.

Most trend-following systems identified these trends, and added significant long positions in global interest rate markets and precious metals over the last several months.  To reinforce the historic non-correlation argument, trend-following returns from stock indices were muted during the quarter.  The volatility of stock markets created an environment that was not conducive to building positions, either long or short.  At the close Q3, however, managers had begun to build long positions in global stock indices as global stocks rallied during September.

Specialized, predominantly non-trend strategies, account for approximately 25% of the Altegris 40 Index. These managers may deploy fundamental investment approaches and discretionary judgment about market direction, or short-term systematic investing, or focus on individual sectors or markets.  These specialized approaches may display unique diversifying characteristics when blended with trend following managers in a managed futures portfolio.

In Q3, managers who specialize in commodity markets

 

were finally presented with trading opportunities driven by economic fundamentals.  I say “finally” because this sector has been hostage to macro forces over the last 12-24 months, and it was a relief for many of these specialized managers to see market prices for commodities respond to genuine supply and demand factors.  Wheat prices rallied sharply as markets digested the impact on global supply from Russian droughts and wildfires, while floods in Pakistan had a similar impact on the prices of sugar, rice and cotton.

Q4 has begun positively for most managed futures strategies.  Many of Q3’s prevailing trends have extended into October, although at any time there is no guarantee that favorable conditions will continue.  But one of the cornerstone benefits of managed futures investing is that there is typically a very wide set of opportunities that professional managers have the potential to participate in.  There are global futures markets tracking price moves in stock indices, interest rates, currencies and commodities. Managed futures can be long or short, depending on the trend or the manager’s view.  This opportunity set is, in my opinion, so much broader than a long position in stocks. Thus it’s really not surprising that managed futures investing has continued to exhibit a long-term historically uncorrelated relationship with many other asset classes, including equities.   

(Genworth Financial recently announced a deal to acquire Altegris Investments; see an explanation for why this will benefit advisors in an exclusive interview with Genworth Financial Wealth Management’s CEO Gurinder Ayuwalia.)

The views expressed by the author are his own, and do not constitute an opinion or analysis of Altegris Advisors, LLC or its affiliates. The risk of loss in trading futures can be substantial.  You can lose all or a substantial amount of your investment and should only invest risk capital. Past performance is not necessarily indicative of future results.

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