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Managed futures struggle after sharp reversals in stock markets

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Managed futures struggled in October as stock market trend reversals and a surge of non-directional volatility compromised many trading models, according to a report by Lipper Tass.

Nevertheless, some discretionary managers, fundamental-driven mean reverting strategies, and carry-trade models were profitable in October, posting positive returns at the end of the month.

The strategy posted a negative 1.41 per cent on average for the month, a minus 0.97 per cent since the beginning of the year, and a positive 3.85 per cent for the rolling 12-month window in US-dollar terms.

The degree of dispersion among individual fund returns increased from the previous month’s reading. A 43.01-percentage-point monthly performance difference in October divided the top and bottom performers of the actively reporting managers tracked by Lipper.

Managers with assets in excess of USD45m showed no performance difference from the overall average reading above. “Large managed futures managers posted a negative 1.30 per cent for the year to date at the end of October and a positive 3.00 per cent for the rolling 12-month window.

Managers struggled in the second half of October on erratic price swings and trend reversals as mixed macro readings pointed to the fragility of the economic recovery, with mounting concerns that an early withdrawal of government stimulus and quantitative easing measures could hinder the feeble economic recovery.

The stock market rally that began in mid-March ended in October when the S&P 500 TR Index declined 1.86 per cent. The other two major US equity indices also showed flat to negative returns, with the Dow Jones Industrials and Nasdaq indices ending the month at 0.00 per cent and minus 3.64 per cent, respectively.

The performance of managed futures managers was dominated by losses triggered by a sharp sell-off in global equity markets and a sudden spike in volatility. The CBOE VIX Index increased 19.84 per cent and climbed back above the 30 mark at the end of the month—the highest reading since July.

Emerging markets maintained their performance pattern intact at the end of the month. The MSCI Emerging Markets TR index closed slightly positive at 0.13 per cent, with Eastern Europe (+4.05 per cent) top-performing throughout the month.

Although long exposure to Asian equities (-0.99 per cent) detracted from manager performance the most, since Asia was the only region posting a negative return, funds that overweighted China equities gained drastically as the Shanghai Composite Index finished the month up 7.79 per cent.

The US dollar continued to lose value against other major currencies, although safe-haven flows in US dollar-denominated assets at the end of the month helped limit the slide to a modest minus 0.46 per cent for October and minus 10.90 per cent year on year, according to the ICE Futures US Dollar Index, a trade-weighted geometric average of six currencies.

Stronger-than-expected readings on US manufacturing and housing activities curbed safe-haven demand for the greenback, driving investment flows to higher-yielding currencies.

While short US dollar exposures suffered in the last week of the month, long euro and long Australian dollar positions sustained managers’ performance as both currencies appreciated against the greenback, with the National Bank of Australia being the first-mover in the tightening cycle.

Also, managers who gained from long currency trades in the yen and pound sterling in September were hurt by a reversal of the strengthening pace of the yen and pound in October.

The struggling greenback boosted demand for dollar-denominated commodities in October, with the Reuters/Jefferies CRB Index jumping 4.24 per cent for October, led by energy (+7.05 per cent) and industrial metals (+3.28 per cent). Crude oil (+8.38 per cent), copper (+4.98 per cent), and zinc (+9.18 per cent) sub-indices gained ground, while natural gas (-10.93 per cent), dampened by elevated production levels and high natural gas storage supplies, continued to see selling pressure.

Increased inflation fears and dollar woes helped push precious metals and base metals prices up. Gold (+3.09 per cent) continued to shine, while silver (-2.41 per cent) finished the month lower.

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