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.