Managed futures performance - delivering crisis alpha through divergent trading

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When there is a market dislocation or divergence, there will be good opportunities for managed futures. January saw an equity sell-off, continued downward pressure on commodities, and economic expectations for slower growth. Many of these themes began in December and were clearly were strongly displayed in price. 

CTA's had their best month in a year with a monthly return of over 4 percent for the strategy index. This was significantly better than the S&P 500 and MSCI World equity indices. The Soc Gen CTA index also outperformed the Barclays Aggregate bond index which only gained a little over 1 percent. The CTA index also posted positive returns versus the Bloomberg Commodity index (DJP) which fell almost 4 percent. The only asset class that outperformed managed futures was the long bond as measured by the TLT ETF. 

The positive correlation with the long bond but slight relative underperformance tell the strategic story behind managed futures. Managed futures gains from holding both long and short positions across a diversified set of derivative markets. It can profit from being both short equities and long bonds. However, the strategy diversification means that when there is a extreme flight to safety managed futures may not be do as well as a concentrated bet on the safe asset. Of course, the ex post holding the safe asset with long duration was the best call, but it would not have provided any safety if the equity sell-off did not occur or the negative correlation did not continue.

Managed futures as measure by traditional trend-followers provides global major diversification based on a strategy of divergent trading. The strategy generated crisis alpha. As we enter February, the key managed futures issue will be position management. If the current market divergences stop, can CTA's control risk?

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