Managed futures trends intact at the end of Q3
Through three quarters of 2011, the managed futures performance trends that emerged earlier in the year remained intact, with discretionary and agricultural programs leading industry returns in what so far has been an up-and-down year.
Through the end of September, the Barclay CTA Index, which reflects the performance of more than 500 managed futures programs tracked by BarclayHedge, was down a fraction of a percent, although a negative October (likely exacerbated by increased market volatility and the abrupt market reversals at the outset of the fourth quarter) pushed performance lower once again. Figure 1 shows the index’s monthly returns as well as the 2011 cumulative return through October, at which point managed futures had posted five winning months and five losing months on the year.
Through Q3, BarclayHedge’s Agricultural Traders Index and Discretionary Traders Index led other sectors by a comfortable margin, returning 3.23% and 2.72%, respectively, as shown in Table 1. (Those sectors were also the only two that posted positive returns in October.) The Systematic and Diversified indices trailed the market, posting returns of -0.63% and -0.96%. By comparison, the S&P 500 index (SPX) was down 10.4% on the year at the end of September, while the S&P GSCI Enhanced Commodity Index (SPGSCIES) had fallen 7.66%.
While the equity market weathered a major sell-off and a sharp spike in volatility during July, August, and September, the Barclay CTA Index posted three consecutive months of gains. The beginning of the fourth quarter was a different story, however. The index fell around 1.5% in October, dropping the year-to-date return below -2%.
Increased fund flows into managed futures
The third quarter marked another record for the managed futures industry’s assets under management (AUM). Total AUM jumped 7.05% from Q2 to top $320 billion — the 10th consecutive quarter of growth dating back to 2009 and the fifth consecutive quarter AUM hit a new record high.
In contrast to their below-par Q3 returns, systematic managers posted a net AUM gain of 7.45% in the third quarter, while diversified traders enjoyed the second-biggest increase, gaining 6.7% (Table 2). Financial/metal traders followed with a net AUM gain of 5.12, while currency traders added 3.23%.
Discretionary managers experienced the biggest AUM drop, shedding -7.55% in Q3, while agricultural traders saw their AUM remain steady at around $1.38 billion after suffering a 22% decline in Q2 — despite leading the industry in returns through the first three quarters of this year.
Markets
Turmoil in financial markets in August and September — fueled in large part by worries over Europe’s sovereign debt problems — drove funds out of both commodities and equities (and into “safe-havens” such as U.S. Treasuries), accelerating the reversals of the broad uptrends in those markets that began in 2009 and peaked in spring 2011 (Figure 2).
As of mid-November, however, it was apparent early October had marked at least a temporary transition point. By the end of October, the S&P 500 had fought its way back to a -0.85% year-to-date loss while the S&P GSCI Commodity Index was up 2.44% for the year, with gains driven by relatively strong rebounds in metals and especially energy markets — crude oil futures leapt more than 30% from their October low below $76/barrel to above $100/barrel by mid-November. Gains in most agricultural commodities (livestock futures being a minor exception) were muted, with prices in grain futures (corn, wheat, rice, soybeans) remaining relatively stagnant after their summer decline.
However, the sharp turnaround in many markets also likely contributed to managed futures losses for the month of October. Many systematic trend-following programs would have switched to the short side in spring and summer as markets sold off, only to reverse direction (perhaps repeatedly) as they waited for markets to establish new trends.
