Altegris is passionate about the managed futures industry and I’m thankful to AdvisorOne for the opportunity to provide regular updates on industry performance and trends. I hope my experience as an alternative investment specialist and market participant over the past 20-plus years can shed some light on this fast growing corner of the investment universe known as managed futures.

Altegris is passionate about the managed futures industry and I'm thankful to AdvisorOne for the opportunity to provide regular updates on industry performance and trends. I hope my experience as an alternative investment specialist and market participant over the past 20-plus years can shed some light on this fast growing corner of the investment universe known as managed futures.

Now to the performance of the markets so far in 2010. It is relatively well known among investment professionals that the managed futures industry was one of the few bright lights among the gloom that pervaded investment portfolios throughout the credit crisis in 2008. We estimate that approximately 75% of the industry utilizes quantitative, trend-following strategies and the well-established trends in 2008 provided a fertile environment for gains. The Altegris 40 Index, which tracks the top 40 managed futures managers, was up +15.47%1 that year (see an explanation of the Index at the bottom of this article). Of course, we all know that past performance is not indicative of future results.

2009 was a different story – the "V"-shaped bottom in stock indices and lack of trend in fixed income and commodities resulted in only the second losing calendar year for the Altegris 40 (-7.98%)1 since its inception in 1990.

Despite that negative year, assets have continued to flow to the Managed futures space. Why? We believe it's because a broader universe of investors, including many advisors, has gained confidence that the asset class may provide non-correlated absolute returns. We believe many advisors and consultants have begun to recommend Managed futures allocations when building well-diversified portfolios. Thus, the 2009 loss was relatively easy to stomach in the broader portfolio context of rapidly recovering stock and fixed income positions.

So where are we now?

The good news for Managed futures investors is that we believe this non-correlation benefit should continue to be at the forefront of portfolio considerations. Year to date through August, the Altegris 40 Index was up +4.44%1, according to International Traders Resource (ITR). In contrast, the S&P 500 Total Return Index was down -4.62%, also according to ITR.

In this environment, where are returns coming from?

In the aggregate, the managed futures industry has profited from owning long positions in global government fixed income. The growing belief in the prospect of a double-dip recession or, at best,

an anemic recovery, has driven investors to the safety of fixed income despite meager yields. The resulting up-trend in bond prices has been the primary source of trend-following returns so far in 2010.

This prevailing trend has not been without its corrections, however. Positive economic sentiment in July drove capital back into equities but that optimism was short-lived. Weak U.S. economic numbers once again fueled the "buy bonds" trend in August as frail U.S. data, including the substantial decline of sales of existing homes and weak jobs report for the month of July, were announced.

Trends in the foreign exchange markets have been present throughout 2010, though not to the same magnitude as fixed income. Of course, the centric trade was in the euro. Severe sovereign debt concerns over Portugal, Ireland and Spain, along with critical default possibilities in Greece, caused a steady decline of the Euro in the first half of 2010. A concerted rescue effort by other European Union members, led by Germany, along with the International Monetary Fund (IMF), helped stem the tide regarding not only the viability of Greek debt but also of the sustainability of the euro itself. In addition, generally positive results from European bank stress tests resulted in a change in investor sentiment. With the market perceiving a possible end to a real crisis, the Euro rallied from a low in June of 1.19 to a high of 1.33 in early August, according to Bloomberg data. The currency subsequently retraced and ended August at 1.27, Bloomberg reported.

Most managed futures managers were profitable with different variations of the short Euro trade from the beginning of the year to early June. However, a number of longer-term managers were caught in the June reversal (with the euro rising) and have given back a portion of earlier profits.

The continued uncertainty of an economic recovery led to "choppy" (defined as no true sustained trend) markets within the commodities sector, with the one exception being gold, which is considered by some to be a safe-haven holding. For example, the energy markets have been, at best, unpredictable for the year. Without a solid base for demand, due to an unknown economic recovery and at times uncertainty regarding the pace of growth in China, markets have been sideways for most of the year. In fact, managed futures managers with higher portfolio exposure to commodities generally performed worse than managers focusing on financial instruments.

Where to go from here? I don't generally make market predictions, but the outcome of inflation versus deflation, "New Normal" or economic recovery, or any number of global geopolitical events is likely to create opportunity for market trends and the potential for success for managed futures managers. I look forward continuing to monitor and analyze these markets with you.

The Altegris 40 Index tracks the performance of the 40 leading managed futures programs, by ending monthly equity (assets) for the previous month, as reported to Altegris. The Altegris 40 Index represents the dollar-weighted average performance of those 40 programs.

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.