Managed Futures & Commodities: Overview & 2012 Outlook

Below is an excerpt from an article by Carlton Chin on Managed Futures, Commodities and corresponding indices, including a Liquid Commodities Index and an Investable Managed Futures Index -- as well as Barclays & NewEdge Indices: 

The performance of the Managed Futures industry and CTAs (Commodity Trading Advisors) is generally uncorrelated to the stock market and other hedge fund strategies. The year 2011 has seen most CTAs flat- to-slightly down, along with most other investment strategies and asset classes.

Here is a sampling of several Managed Futures industry benchmarks through the end of November:

• Barclays CTA Index -3.1%
• Barclays BTOP 50 Index -4.0%
• NewEdge CTA Index -4.7%
• NewEdge Trend Sub Index -8.4%
• Investable Managed Futures Index 0.0%

Although CTAs would have loved to achieve positive returns this year – to further its diversification arguments – the Managed Futures industry has already proven its diversification mettle in 2008, when CTAs produced double-digit returns during the start of the financial meltdown. In particular, the Barclays CTA Index was up 14.1% and the Investable Managed Futures Index was up 25.5% in 2008, when the S&P 500 was down -37.0%.


AN INVESTMENT IN FUTURES CAN RESULT IN LOSSES.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Managed Futures and S&P 500 Annual Performance

Notes:

• Annual returns for S&P 500 and Investable Managed Futures Index.
• 2011 Returns are year-to-date as of November 30, 2011.

The author, Carlton Chin, CFA (CTA and portfolio manager at Adamah Capital) is a specialist in systematic and quantitative investment strategies as well as dynamic asset allocation.  He believes that alternative assets can help diversify traditional portfolios of stocks & bonds -- and improve risk-adjusted returns. 

Read more here:

http://seekingalpha.com/article/312307-managed-futures-and-commodities-overview-and-outlook-for-2012




Carlton Chin, CFA, is the portfolio manager for ADAMAH Capital, which specializes in Computer Aided Research & Advanced Technology (CARAT). He is a specialist in quantitative investment strategies, managed futures, alternative assets, global macro & strategic asset allocation. Carlton combines a CTA hedge fund background with portfolio optimization work for institutional investors. He founded Adamah with his long-time friend and associate, George Parr. Carlton has been quoted and featured in the Wall St. Journal, NY Times, MARhedge, Futures Magazine, and Financial Trader. He holds both undergraduate and graduate degrees from MIT.

Volatile Commodities & Futures Markets

Just a quick report on the volatility in the commodities & futures markets.  Our risk management approaches got us out of oil and gold before the steep declines today.  On the other hand, the downdraft crept into many other markets (industrial metals, agriculturals, foreign currencies, US Dollar) -- and reversed long-standing trends in early May.  This caused us to give up much of the recent profits we have earned over the past several weeks.  Our Diversified Programs are down about -3.5% this month.

As reported by MarketWatch, commodities suffered their worst decline since 2009.  Please read more here:

http://www.marketwatch.com/story/commodities-suffer-worst-slide-since-2009-2011-05-05?dist=afterbell

CRB Index Past 3 months (as of 5/5/11; see the last bar on the right...)

Thank you to INO.com for the chart.

***

Today alone, crude oil declined $10/barrel to below $100 and gold declined about $50/ounce to below $1500.  The Liquid Commodity Index reflected the recent volatility -- declining -5% today (May 5, 2011); and is down -8.6% for the month, after rising to new highs in April.   

We currently have relatively small positions, reflecting the reversals and volatility in the futures markets.  We will, of course, continue to "do what we do" -- and will follow our trading system/risk management strategies. (Unfortunately, this kind of market action is not unprecedented.)

Please let us know if you have any questions.

Commodities: Prices & Volatility Increase (Capturing Profits with Managed Futures)

Below are excerpts from our SeekingAlpha article on the recent spike in commodity prices -- and sudden sharp reversal. The increased volatility presents challenges to CTAs as futures traders balance the offsetting goals of:

• capturing additional profits, while
• protecting existing principal.

The article discusses methods that managed futures programs use to capture -- and retain profits from the futures markets. For the complete text and some charts, please visit the link.

http://seekingalpha.com/article/236692-commodities-prices-and-volatility-increase

Recent months have seen a continued decline in the U.S. dollar and an associated rise in commodities prices. After a relatively steady climb in commodity prices since May, commodity prices spiked early in November. Gold crossed above the $1400/ounce level and crude oil challenged the $90/barrel level. Along with the rise in commodity prices, volatility has suddenly picked up this past week in the commodity futures markets.

Some additional recent futures market activity, reflected by the Liquid Commodities Index (LCI):

• Since hitting a recent low at May 31, 2010, commodities have rallied strongly, with the LCI rallying more than 20%.

...

The investable, "Liquid Commodities Index" (LCI), was designed so that Adamah Capital could more easily track the price movements of the commodity futures markets. The LCI has a very high correlation (about 0.98) to other commodities indices, has slightly better risk/return characteristics, and is a good low-fee alternative for investors seeking the diversification benefits of the major commodities markets.

Managed Futures

In addition to a passive approach to investing in commodities, some investors seek a more actively-managed approach to futures, namely "managed futures." These products can capture both up and down movements within the futures markets. The Liquid Commodities Index showed the "buy and hold" performance of the commodities markets over the past several months.

...

... The Adamah Diversified Program captured profits in the futures markets over the past few months -- and protected profits during the sharp reversal of the week ending November 12, 2010, maintaining about 75% of the month's gains.

...

Many managed futures programs are systematic and aim to capture moves within the futures markets. While no program will be successful all of the time, a good trading strategy will attempt to capture the profit opportunities within the markets -- maintain these profits -- and minimize risk and whipsaw losses during more difficult trading environments.

Quantitative trading programs often manage and monitor risk on both a "trading system" level as well as on a "portfolio level." Trading strategies are often based on historical simulations, as well as statistical and systematic research. They are also tested in a multitude of ways to increase the comfort level of robustness and improve the "forward information" of the strategies. These methods include blind-testing, bootstrapping, Monte Carlo, and other methods to maximize the effective use of data.

Finally, CTAs monitor and manage risk within their portfolios using a number of metrics and models. In addition to capturing the opportunities the futures markets offer, it is essential to protect these profits. In today's economic environment -- with commodity price volatility increasing -- risk management and "protecting profits" are particularly important.

___

Carlton Chin, CFA, is the portfolio manager for ADAMAH Capital, which specializes in Computer Aided Research & Advanced Technology (CARAT). He founded Adamah with his long-time friend and associate, George Parr. Carlton has been quoted and featured in the Wall St. Journal, NY Times, MARhedge, Futures Magazine, and Financial Trader. He holds both undergraduate and graduate degrees from MIT.