The 2020 CTA Challenge – March Newsletter
The First 10 weeks of 2020 – Volatility and the Bears
It was not so long ago that US stocks were in a seemingly never-ending bull market. For the past 11 years, the stock market rewarded any and all participants that chose a long only strategy. Easy money was made with little to no skill needed to participate; just buy-and-hold seemed to do the trick for most. Diversification was a talking point but not many truly acted upon it because people felt they didn’t need to while the stock market continued to tick upward with no end in sight. All that appears to have changed in these past few weeks as bulls turned to bears and US stock market prices sharply declined. Now, what you held in your portfolio these past few weeks made all the difference.
Over a decade ago, at the bottom of the last big stock market correction, the S&P 500 Index month-end close for February 2009 was a paltry 735.09 with the VIX sitting at 19.50. That marked near the bottom of an 18 month long bear market that resulted in more than a 50% decline in the index. The S&P 500 Index has made steady gains ever since that point, as it crawled out of the second largest recession in US history known as “The Great Recession”.
11 years later, as we started February 2020 at the pinnacle of the longest bull market in our lifetime, we find complacency and status quo buy-and-hold stock market strategies still making up the majority of investment portfolios. It has been apparent for quite some time that many investors, over the past decade, have forgotten what volatility really looked like (and what a true stock market correction of -20% or more felt like) as they casually enjoyed positive returns without many hiccups along the way. True diversification is rare these days. Regardless of how many stocks you have in your portfolio, an overall bear market in equities will prove once again that actual diversification is required. There is a strong need for non-correlated investments and items considered “not stocks” should be included in your investment portfolio to help lessen the blow when the stock markets turn south. We’ll make the case for Managed Futures shortly.
Tracking the recent moves of the CBOE Volatility Index (VIX), the point value measure of expected volatility in the US stock market indices, we did not see much indication of large expected moves in the S&P or any similar index. The VIX value remained in a fairly tight range from about 10-20 throughout most of the last 8 years up until late February 2020, aside from a few spikes to the mid 20s. All things considered, the VIX maintained a historically low value for an extended period that gave us a [false] sense of security before the coming storm in the stock market.
Let’s go back to December 31, 2019. The S&P 500 Index closed at 3,230.78, up +28.88% for the year and capping off the longest bull market of the last century. The CBOE Volatility Index (VIX) which measures the expected volatility in the stock market, closes at 13.78 after staying calm in the mid teen range most of the year. The below data paints the picture of the next 10 weeks as we move into 2020. On the graph, the left axis is the S&P 500 Index and the right axis is the VIX.
The S&P 500 on January 31, 2020 closes at 3,225.52, virtually unchanged throughout the month. We see February 19 where the S&P 500 closes at 3,386.15 (an all-time high) and the VIX is sitting at a low point of 14.38. Within a few days, the conditions start to quickly turn south, specifically in the last week of February. The S&P 500 closes February 28 at 2,954.22, down 12.76% from the high and a 8.41% loss for the month while the VIX settles at 40.11 (the first time the VIX has breached 40 since 2011). And then comes March with a further collapse of the S&P 500 Index, down to 2,741.38 at the close on 3/11 while the VIX closes at an astounding 53.90! Only 10 weeks into 2020 and the S&P 500 is now at a 7.2% loss for the month of March, a 15.15% loss on the year and a 19.04% loss since the high point exactly 3 weeks ago….and the VIX spikes above 50 for the 2nd time in the past 30 years. March 12th and moving forward is already looking to be full of volatility and more negative performance for the S&P 500 Index.
The Case for Managed Futures
In tracking the 115 participants in the 2020 CTA Challenge participants, a broad list of Managed Futures programs that are by design non-correlated with stock markets and the S&P 500 Index, we see quite a different picture than what equities have produced this year.
2019 rounded out to be a good year overall for CTAs trading Managed Futures programs, with the Coquest 40 Index (a weighted index of the top 40 Managed Futures programs by assets under management) producing +7.53% for the year. The Coquest 40 Index returns were not as high as the S&P 500 Index, but still quite good for 2019.
Now 2020 is where the non-correlation really steps up to help. The Coquest 40 Index was down -0.50% in 2020 through the end of February. Not much to brag about but compared to equities this is a very preferable result.
In checking the pulse of the Managed Futures industry for March 01-11 this year, we go to the CTA Challenge live tracking accounts with daily transparency for an update. Across all 115 tracked Managed Futures programs in the 2020 CTA Challenge, the performance range is -6.57% to +14.84% (gross of fees) month-to-date for March, with a median of +0.21% and a mean of +0.67%. The CTA space is greatly outpacing the US stock market this month, posting mostly positive returns across the board in March and tipping into overall positive year-to-date territory. With a portion of your investment portfolio removed from stocks and allocated to Managed Futures, generally speaking, you would have had a much better experience over the past 10 weeks. If I was a betting man, I would suspect this argument will prove stronger in the weeks to come.
Managed Futures investment strategies, traded by CTAs, as well as Global Macro investment strategies, prove themselves consistently again and again to be non-correlated with the S&P 500 Index and the general stock market. These investments do not necessarily go up when the stock market goes down (negatively correlated) nor do they necessarily go up when the stock market goes up (positively correlated). Managed Futures investments simply behave completely different and are based on the skill (and sometimes luck) of the trading program and its architects more so than the direction of the economy or the stock market. Investments in Managed Futures programs, like anything, should be done with careful consideration.
And, as always, past performance is not indicative of future results.
The CTA Challenge at a Glance
Commodity Trading Advisors (CTAs) are investment managers who trade on-exchange futures contracts. Their products, available for investment to qualified individuals, tend to produce returns that are non-correlated with the stock and bond markets. The level of skill required to trade in the futures markets is considered more difficult than most other capital markets due to the inherent leverage of the traded contracts as well as the ability to go long or short at any time. Futures contracts are available for thousands of global commodity and financial instruments, from Lean Hogs, Wheat, Gold, Crude Oil and Coffee to the S&P 500 index, EUR/JPY cross rate, US 10Y T-Notes, the German Dax index and even Bitcoin. This allows CTAs to participate in the prices moves of a vast number of products controlled by supply and demand as well as geopolitical decisions…but rarely affected by the decisions made in a corporate board room as is the case with each company in the stock market.
The unpredictable nature of futures market price moves, in both direction and size, require CTAs to employ hefty risk controls if they want to protect customers from large losses in their investment accounts. Because of this additional layer of complexity, we cannot simply focus on performance returns when evaluating a CTA investment program. In the CTA Challenge, we take a risk-adjusted approach to analyzing and ranking CTA programs to ensure we are evaluating performance and risk numbers achieved as well as performance and risk amounts exposed. We are evaluating “what actually happened” while also looking at “what could have happened”. See below for the most recent Top 5 ranked programs year-to-date in the CTA Challenge.
2019 CTA Challenge:
Top 5 Ranking Through The End Of December
#1: Quantica Capital AG / Managed Futures Program *QEP*
#2: County Cork LLC / Acclivity Program *QEP*
#3: Fort LP / Global Contrarian Program *QEP*
#4: Automaton Trading LLC / Diversified Program *QEP*
#5: AG Capital Investments LLC / Discretionary Global Macro Program
See the full current rankings here.
*2020 initial rankings will be published in the next issue of this newsletter.
CTAs interested in participating, or investors interested in learning more about CTAs and Managed Futures investment strategies, should contact Coquest and the CTA Challenge by Clicking Here.
ADM Investor Services, Inc. (ADMIS) has been a leader in the futures brokerage industry for over 50 years. The company is a registered Futures Commission Merchant known for its financial strength and expert customer service. ADMIS serves a broad base of managed futures professionals and their clients as well as institutional, commercial and retail customers.
Headquartered in Chicago, ADMIS is a wholly owned subsidiary of the Archer Daniels Midland Company (NYSE:ADM). It’s work is supported through a diverse network of institutional and introducing brokers, branch offices and global affiliated companies located in London, Hong Kong, Taiwan and Singapore.
AG Capital Investments LLC is a discretionary, fundamentally oriented global macro investment firm. AG Capital invests using fundamental analysis for directional exposure and technical analysis for risk management, employing long-short strategies across equity, fixed income, currency and commodity futures markets.
Upcoming Events – Mark Your Calendars!
CTA Expo / Emerging Manager Forum
April 22-23, 2020
Stewart Hotel, New York, NY
TEXPERS – 2020 Annual Conference
May 2-6, 2020
Moody Gardens Hotel, Spa & Convention Center, Galveston, TX
cmdtyExchange Grain Summit 2020
May 4-6, 2020
Venue SIX10, Chicago, IL
Talking Hedge – Toronto
June 10-11, 2020
The Westin Harbour Castle, Toronto, Ontario, Canada
MFA Forum 2020
June 16, 2020
Four Seasons Hotel, Chicago, IL
Coquest Annual Soiree
June 16, 2020
TBD, Chicago, IL
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