Commodity in focus: Part 2 - Timing

Last month we talked about the shift in sentiment towards the commodity markets. We are seeing this with both institutional and retail investors. There is a positive view given where we are in the long-term cycle, inflation, global demand, and for portfolio diversification reasons.

We highlighted that timing is hard and as such we advocate adding a tactical commodity sleeve to a diversified portfolio has the potential to improve risk-adjusted returns, regardless of the timing and cycle in commodities.

However, what people asked about is indeed the timing aspect and thus we wanted to clarify something: At Auspice we believe the opportunity in commodities is greater than we have seen in almost 10 years. Actually, more like 20, since the late 90’s.  

The chart that says it all:

 Source: Dr.Torsten Dennin, Incrementum AG

Source: Dr.Torsten Dennin, Incrementum AG

As such, while timing things is hard and we advocate for aiming to build better portfolios, we believe now is the time to be looking at this asset class and importantly the best ways to gain access. We would be happy to help you with this.

For more information on this topic, please refer to the Auspice Commodity white paper on the website under Resources/Research.

For more information, give us a call.

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

 Auspice Broad Commodity Excess Return Index (ABCERI): The Auspice Broad Commodity Index aims to capture upward trends in the commodity markets while minimizing risk during downtrends. The index is tactical long strategy that focuses on Momentum and Term Structure to track either long or flat positions in a diversified portfolio of commodity futures which cover the energy, metal, and agricultural sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess return (non-collateralized) versions.

*Returns for Auspice Broad Commodity Excess Return Index or “ABCERI” represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees or operating expenses.

The performance of Auspice Broad Commodity Index prior to 9/30/2010 is simulated and hypothetical as published by the NYSE. All performance data for all indices assumes the reinvestment of all distributions. To the extent information for the index for the period prior to its initial calculation date is made available, any such information will be simulated (i.e., calculations of how the index might have performed during that time period if the index had existed). Any comparisons, assertions and conclusions regarding the performance of the index during the time period prior to the initial calculation date will be based on back-testing. 

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in BARCAP US AGG Bond index, rebalanced annually.

BARCAP US AGG Bond: the Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bondsCorporate bonds, and a small amount of foreign bonds traded in U.S.  The Bloomberg Barclays US Aggregate Bond Index is an intermediate term index. The average maturity as of December 31, 2009 was 4.57 years.  The Bloomberg Barclays US Aggregate Bond Index, which until August 24, 2016 was called the Barclays Capital Aggregate Bond Index, and which until November 3, 2008 was called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Bloomberg L.P. since August 24, 2016.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

 For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

 

Commodity in focus

Commodity in focus

The last few months has seen a remarkable shift in market sentiment. While previously it seemed like everyone was talking about the same market view regarding direction, and this was backed up by the prevailing up-trend, this has changed significantly since the new year.

We are not talking about equity markets. We are talking about commodities.

A year ago no one wanted to talk about Commodities - what a difference a year makes. At Auspice we believe the opportunity in commodities is greater than we have seen in almost 10 years. The fact is that, like anything, there are periods of opportunity and periods of challenge. We believe this is a rare opportunity. So when does one step in?

As we have said many times before, timing things is hard (see February 5th blog post). As such instead of focusing on perfect timing (an arguably futile effort), we advocate for aiming to build better portfolios. At Auspice we believe adding commodities builds a better portfolio, and the data backs this up. As outlined in the Auspice published white paper (Benefit 2: Diversification on page 5):

Despite the lackluster performance of commodities over the last decade, including the (commodity) asset class in a portfolio long-term is historically accretive.  Moreover, “Including a tactical broad commodity index allocation has the ability to improve overall performance and significantly reduces volatility and drawdowns.” Per the Figure below, the addition of this commodity benchmark not only improves historical returns and risk metrics, it also reduces the portfolio correlation to the (stock) market itself.

Commodity Diversification Blog May 2018.PNG

So while timing isn’t everything, and who knows if its “perfect”, it looks decent right now. And from a portfolio perspective, we know it makes sense.

Unfortunately, there is very little product in this space in Canada.  However, Auspice has been managing tactical broad commodity exposure in this space for many years.  Please reach out and let’s try to find a solution for you or your organization.

For more information on this topic, please refer to the Auspice Commodity white paper on the website under Resources/Research.

For more information, give us a call. 

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Broad Commodity Excess Return Index (ABCERI): The Auspice Broad Commodity Index aims to capture upward trends in the commodity markets while minimizing risk during downtrends. The index is tactical long strategy that focuses on Momentum and Term Structure to track either long or flat positions in a diversified portfolio of commodity futures which cover the energy, metal, and agricultural sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess return (non-collateralized) versions.

*Returns for Auspice Broad Commodity Excess Return Index or “ABCERI” represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees or operating expenses.

The performance of Auspice Broad Commodity Index prior to 9/30/2010 is simulated and hypothetical as published by the NYSE. All performance data for all indices assumes the reinvestment of all distributions. To the extent information for the index for the period prior to its initial calculation date is made available, any such information will be simulated (i.e., calculations of how the index might have performed during that time period if the index had existed). Any comparisons, assertions and conclusions regarding the performance of the index during the time period prior to the initial calculation date will be based on back-testing. 

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in BARCAP US AGG Bond index, rebalanced annually.

BARCAP US AGG Bond: the Bloomberg Barclays US Aggregate Bond Index is a market capitalization-weighted index, meaning the securities in the index are weighted according to the market size of each bond type. Most U.S. traded investment grade bonds are represented. Municipal bonds, and Treasury Inflation-Protected Securities are excluded, due to tax treatment issues. The index includes Treasury securities, Government agency bonds, Mortgage-backed bondsCorporate bonds, and a small amount of foreign bonds traded in U.S.  The Bloomberg Barclays US Aggregate Bond Index is an intermediate term index. The average maturity as of December 31, 2009 was 4.57 years.  The Bloomberg Barclays US Aggregate Bond Index, which until August 24, 2016 was called the Barclays Capital Aggregate Bond Index, and which until November 3, 2008 was called the "Lehman Aggregate Bond Index," is a broad base index, maintained by Bloomberg L.P. since August 24, 2016.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

Did you know?  Canadian Oil Facts and Opportunity

Did you know? Canadian Oil Facts and Opportunity

While many of our investors, industry peers, and gawkers alike have an interest or know something about commodities, here is a little slice of something you may not know about Canadian Oil and why it is a great market to trade. While the market talks about WTI (West Texas Intermediate) almost singularly, that is like saying Copper is the only metal that matters.

Some facts:

  • Canada has the 3rd largest oil reserves in the world only behind Venezuela and Saudi Arabia and the largest foreign supplier of oil to the US at over 40% of all US imports. This is more than all OPEC producers combined and roughly 3 times what Saudi Arabia itself supplies. Almost all of Cdn oil production goes to the US.
  • There is huge global demand for heavy crude as refineries get better margins from heavy-sour crude and demand is increasing.
  • Canadian Crude is discounted from WTI primarily due to transportation constraints and costs not the grade – heavy-sour.

What does it mean?

1.   Discount Barrel:   While highly correlated to the more well-known “WTI”, due to transport costs, Canadian crude trades at a discount. The discounted price leads to higher volatility and returns (up and down) without the drawbacks of traditional leverage, creating opportunistic trading setups.

2.   Alpha Barrel: Given the scale and importance of Canadian volume to the US, this supply is not only valuable but influential on all crude pricing in North America. Including the Canadian barrel enables an opportunity to create an outperforming exposure.

 3.  Infrastructure Barrel: The CCX ETF is currently the only way to get exposure to heavy-sour crude, which is in high demand by refineries in the US and globally in the developing world.  Demand for infrastructure means demand for heavy-sour barrels and the Canadian market share meeting heavy oil demand is increasing in the US and in Asia as tide water access is developed.

 

Full transparency: Auspice created the Canadian Crude Index (CCI) and CCX ETF to enable access to this market. The CCX has been listed in TSX in Canada and we have partnered to launch the product in the US under the ticker UCCO (NYSE).  US Commodity Funds, who run the USO ETF, the largest oil ETF globally, began working with Auspice in 2016 on bringing this exposure to the US market.

For more information, give us a call. 

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES 

Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7. 

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

Odd Duck or Rare Breed?

Odd Duck or Rare Breed?

Someone said that one definition of an odd duck is "someone who enjoys that which others seem to despise".  You have to love being different. Given we are not equity focused at Auspice, we are by default an odd duck. But it begs the question are we a Rare Breed?

When we created Auspice, we intended to provide a product suite that was different than typical managers in our sector.  We are one of the few managers in Canada that have a commodity background and are focused on strategies outside of the resource and/or equity sector. We are proud of that.

For example, taking hedge funds and commodity products into the retail ETF space, pure energy ETFs (Canadian Natural Gas and Crude) are odd duck approaches.  Even our flagship fund, a quantitative rules-based multi-strategy is an odd duck in Canada. However, on closer inspection it is a commodity tilted approach highlighting our unique backgrounds within energy commodities at an energy major and a Canadian bank - it is our expertise and perhaps demonstrates we are a rare breed.  

Yet, while commodities were a popular place to be from 2001 to 2010, this changed with the relentless charge of the equity market in the last 8 years where it worked to put your client in equities and close your eyes. But that is changing.  People are scared. The concern over the stock market is real and warranted. Moreover, increasing interest rates and volatility, while concerning for many, is actually more like normal and this is an environment we historically thrive on.  All of a sudden being different is cool again. 

We are seeing a shift in interest to commodities for good (great) reason.  Historically, the sector is undervalued versus equities - very stretched. Moreover, like equities, commodity volatility has been low but this has been increasing.  We love it.

As such, we will remain focused outside of equity and creating products that are complimentary to typical portfolios.  We do not guarantee returns on every short, quick market pullback - the 10% dive in the first few days of early February is an example. What we focus on providing returns outside stocks from trends that develop on sustained corrections and volatility.  That is our domain of experience.  We overweight commodities but don't ignore currencies, interest rates/bonds and yes, even equity indices. We simply do not pick stocks.

Are we an odd duck? Perhaps.  But remember, odd ducks only seems odd from a certain perspective.  Everyone has a community - it just may not be your community.  What you are looking for is the Rare Breed amongst the Odd ducks.  Do something different than the pack, then do it different than your peers, do it better. And love it.

If any of this appeals to you, give us a call.

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

Correction: What happened and is it over?

Correction: What happened and is it over?

Much has been written about the stock market correction in February. Meeting the traditional definition, peak to trough, markets fell more than 10% (the market peaked January 26th to bottom February 8th).  Since the lows, it bounced back substantially.   

What drove the correction?

We have heard the blame laid on “computers”: algorithmic/program trading, CTAs, quants, stop-loss selling – the list goes on.

But as we tabled over the last few months, inflation concerns have been building for some time as central banks voiced concerns and took action with rate increases while alluding to more. At Auspice we experience inflation concern as demand for commodity products that increased in late 2017 and early 2018 actually rising in the first week of February - despite the stock market sell-off.

Additionally, there has been a growing discussion regarding the over-valuation of stocks yet  the market kept moving higher while other assets are at historically low levels. Commodities are in this camp. Correspondingly the VIX was at all time lows.  The trade that kept on giving until it bit back as volatility expanded quickly.

Further discussions of “FOMO” was used to describe the market action.  The “fear of missing out” is simply putting a new media acronym for “herd behavior”.  Scary if the only reason for a market to be going up is FOMO. But more importantly, if the market is driven by “FOMO”, then it should be no surprise that it is fragile enough to quickly and sharply correct. 

What is the trend? The long term trend in equity has indeed been up - for over 9 years. However, the trend is at question if we retest the lows. We started exiting long trends in equity in January (as well as covering the VIX short) and further exited all equity exposure in early days of February. While we don’t have a crystal ball to market direction, what we do know is the low volatility regime for the markets and economy is likely over for now.

To keep in mind: There hadn’t been a correction in over 2 years which is one of the longer periods without a correction in 80 years. Remember, corrections are normal, they are frequent (36 times in the 38 years since 1980) and likely to happen more often after having been so infrequent for so long.

Given a return to more normal volatility, and a heightened concern for further “corrections”, we believe this is not over.  Stay tuned for more volatility regardless of ultimate direction.

 

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7. 

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

Timing markets and strategies

Timing markets and strategies

Timing things is hard. Like timing when to cross a busy road (just ask any gopher). We have a visual on the situation and there are no invisible cars. We have all the information we need to make the decision and time on our side.

In the markets, even though we have many visuals (charts, prices, advice, commentary etc.), we surely do not have all the information. We are playing blind because we can’t see a lot of what is driving the market. Moreover, markets are affected by many things we cannot see like fundamental factors, crowd behavior and hype along with hope, greed or panic.

Timing a particular investment strategy that participates in the markets is arguably even harder. Yet, investors have got used to trying to do this in investment strategies - and perhaps it can work in some areas. If the strategy is highly correlated to equity (as the bulk of investment strategies are) or fixed income, it is indeed possible. For example, if you are trying to time a long biased fund manager in equities or bonds, you have a fighting chance given interest rate movements and equity cycles are visible.

But what about a strategy that has no correlation to equity, fixed income or anything else While adding this type of non-correlated investment may be beneficial for portfolio diversification, when do you add it?

This is even more complicated if you are trying to time a strategy that is designed to time and capture market trends, up or down, across many asset types including sectors as diverse as commodities. What do you gauge it on?

We often have investors trying to time when to invest with us or other similar managers saying they want to add us at the ideal time -  for example when non-correlated returns are most needed (loosely translates to when equity is falling). That is super challenging given the emotional aspects of investing.  It’s like buying insurance after the house is on fire – i.e. a little too late.

The solution? Don’t try to time non-correlated strategies – it is a poor use of time.  Build a better portfolio by finding the right mix of assets, strategies, and risk diversifiers. Perhaps over weighting at times when one fears the overall portfolio risk is too far tilted to a certain asset classes performance (i.e equities) or underweight after the non-correlated strategy has done exceptionally well.

Play in traffic if you must. Just don’t do it blind.

But, don’t try to time the timer.

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

 

Everyone has his day

Everyone has his day

When listening to the financial media, you would think nothing happened in 2017. The equity market went up in a low volatility fashion – again. Commodities remained out of favor. Interest Rates remained low and there was little worry of inflation.

But the reality is 2017 was indeed a year of massive change and new experiences.

It started with a president inaugurated in the US to which many believed would cause the market to tank and usher in enormous volatility – it didn’t happen.  In fact, Q1 was amongst the lowest volatility periods ever experienced even in markets like energy futures. Many talking heads said oil would be “lower for longer” and $40-50 was the new paradigm – yet we ended up at $60. The demand from China and India is significant and China is now the largest global importer.

Curiously, despite the lack of inflation, the Fed indeed started raising rates. Canada followed suit in July, the first in seven years. The year ended with Bank of England Governor Mark Carney warning inflation had hit its highest point in 5 years. Rhetoric around the topic highlights that the short term risk of inflation may be low, but a possible cause for concern in the long term.

Marijuana stocks started as water cooler conversations and then eventually dominated the media. Then to take it to the next level, cryptocurrencies including Bitcoin began to soar and there was a new conversation to have. Both had loads of volatility that have been missing from traditional assets.

While the crowds of sage investors shyed away from the cannabis conversation they had lots to say about Bitcoin with the famed Charlie Munger from Berkshire Hathaway calling it “total insanity”. He said it produces no earnings, and cannot be valued. It sounded a lot like Julian Roberson missing the dot com bubble in early 2000.

What does it all mean?

Nothing stays the same. The volatility shifted from places we typically look, to new places.  And it will likely shift again. Expect higher volatility.

Things that did stay the same, or same direction and low volatility, are the things you need to think about. 

It reminds me of a quote from Winston Churchill: “Everyone has his day and some days last longer than others.”

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

 

Futures and Bitcoin

Futures and Bitcoin


We trade and invest using futures as a financial tool to gain exposure to the markets.

They are just that, a tool, for investing in the markets. While most investors are more
familiar with stocks and ETFs, futures allow us to create nearly identical exposures using
a slightly different tool.

In the last couple weeks I have heard more people talking about futures than ever before.
People totally unrelated to the markets, are asking me about futures.  People who have
never traded a futures contract ever before, are talking about it. Why? Bitcoin.

While I will leave the bitcoin and blockchain discussion to another post, I will comment
on the importance of the imminent emergence of futures around this market.

At Auspice, our primary tool to trade is futures for several good reasons: Futures are
available in many globally diverse financial and commodity markets, they are 100%
transparent in pricing, liquidity is excellent, and it is just as easy to go short futures as it
is to go long. This is a very important feature for us given we are agnostic to the
direction of the market, rather targeting the trends either way.  Many futures markets
trade 24 hours a day having evolved to electronic trading from physical trading pits in the
last decade. Moreover, the counterparty is the exchange and thus there is no counterparty
credit risk.   Another key feature of futures is that they are very efficient given they trade
“on margin" freeing up capital for other investment purposes.

But probably one of the most comforting aspects of trading futures is that they are tightly
regulated as they are considered an integral part of the financial system.  This creates
credibility, confidence and trust.  As such, we believe it is one of the pieces of the puzzle
that not only legitimizes a marketplace but also enables mass acceptance.  All of the
major financial markets have futures markets built around them. It brings together buyers
and importantly sellers. It brings together speculators, hedgers, both retail and
institutional creating a level playing field for all to participate in a forum that is designed
to protect investor assets.

Whether or not people will look back at this moment in time and view it as a "bitcoin
bubble" or not, many believe cryptocurrencies are here to stay.  While some may argue
that trading Bitcoin futures on a regulated exchange is contrary to some of its founding
principles, the reality is that the futures market is a risk management tool for buyers and
sellers and does not detract from trading of the underlying asset. While futures cannot
make Bitcoin successful long term, it does add legitimacy to it as a real financial market.

And while there are many unknowns, we believe this changes the conversation. 

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate term US Treasuries), rebalanced monthly.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

The Entrepreneur and the Trader

The Entrepreneur and the Trader

I recently spoke at my daughter's high school career day. Understandably, they needed to put a label on what I do. I struggle a bit each time someone asks my title: What am I - a Trader, Risk manager CIO, CEO, Fund Manager?  Perhaps all of that, but in the end I am an entrepreneur. 

For career day, I chose not to worry about title, and focused instead on the message I hoped to give.  Kids today are much more savvy about what an entrepreneur is (as well as everything else), but they are given very little opportunity to learn about it in the school curriculum - a crying shame.  As such I didn't want to scare them off - but perhaps lure them in with the idea of an interesting career in trading before getting to the challenges of running your own business.

Career day got me thinking about my own path. While I identified with the vocation of being a trader while working at large institutional investors, the decision to start my own shop was pure entrepreneurship. It’s no different from someone who starts in a steel yard and ends up running a company or the programmer who develops a more efficient way of communicating, selling or getting a ride.

Since starting Auspice, I’ve realized that being a trader provides a very similar development path to that of an entrepreneur.   Both are about managing risk and often making decisions very quickly, dealing with consequences immediately.  Yet, while seemingly a perfect setup to being an entrepreneur, the big difference is, once you decide to hang your own shingle, you are forced to make broad decisions in every facet of business. Business development, sales, accounting, marketing, finance, operations – they’re all your responsibility, not just "trading".  It doesn't matter what type of business you start - the ability to sell and communicate what you do while building relationships is mission critical. Ideally, you do this while offering something unique and innovative. 

However, just because you’re a good trader or steel worker or programmer, there’s no guarantee you’ll be a good business person or entrepreneur. It requires a broad base of skills and the humility to understand what you’re not good at, so you can hire people who bring the experience you lack.  Many traders simply aren't cut out to be an entrepreneur.

Going from employee to owner requires extreme commitment and sacrifice. It’s a lifestyle choice for you and your family. Your compensation won't be a straight line - it will be lumpy. Thus, it must be your passion. 

The more I’ve thought about it, the more I’ve realized that while I am a trader, risk manager and CIO, what I am most proud of above everything else- is that I am an entrepreneur. 

And here is the personal difference: every time you do business with an entrepreneur as opposed to an institution, an actual personal does a little happy dance and is proud.

 Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

 

What is the point (of a Hedge Fund?)

What is the point (of a Hedge Fund?)

I have heard this asked many times lately – especially in light of the equity market charging higher – seemingly with no end in sight.

Most investors, both retail and institutional, have significant concentrated equity exposure.  Since 2007, a typical 60-40 portfolio has a 95% correlation to the S&P500. Even more diverse public institutional portfolios we have witnessed have correlations as much as 85%.

Being long equity has worked and perhaps the equity tilt is the right path for the next X years.  Who are we to judge –maybe the equity market is the upside opportunity that can’t be missed. But how do you justify the risk?

When I sit down with clients and prospects, I am very up front. We don’t make money every month, or every quarter, or even every year.  After gaining over 40% in 2008, our returns lag the S&P. What we hope to do is make money when you need it most. We give you comfort to do what you are doing knowing we have your back by improving your portfolio.

Overlaying the benchmark Auspice Managed Futures Index (as published by the NYSE), we can see that a 20% allocation doesn’t take away the upside opportunity at all.  It improves not only absolute returns, but also reduces relative risk (23 % lower volatility, 40% less drawdown).

60-40 and AMFERI.png

Is it insurance? Kind of -  but unlike pure insurance, which is statistically a negative investment return for the consumer, we have a positive expected value over time. Not all the time, but over time and hopefully when you need it.  It is not just in years like 2008 that you need help: it is also in recovery post crisis in 2010, in the volatility of 2014, and the shifting economic and political landscape of 2016. 

While the stock market marches higher, and you ask yourself, “why would I ever consider a hedge fund asset like Auspice?” Remember that diversification and downside protection make a portfolio better.  When you need help, we are (historically) there for you and your portfolio. And in the good times of equity bliss...we aren’t too much of a drag.

So what is the point? The point is to be able to keep doing what you are doing but having some piece of mind.  Upside Opportunity and Downside protection.  Don't try to time this as the best time to add non-correlated returns is right now.

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

Term January 2007 to May 2017

On Sale

On Sale.png

Typically, when something is on sale, it means that the item is offered at a discounted price for a limited time. This is done to pique the interest of buyers and ramp up demand because everybody, no matter how well off, loves a bargain. It’s straight retail gospel.  

In the world of investments, we often hear that a stock is "on sale" or "lagging" because some factor has pulled its price down. Usually, this is temporary in nature, seeing as the company's business or overall strategy remains solid, causing most retail and institutional investors to get excited. Just like being at the mall, when investors find a sale on a stock, they want to buy it. It is irresistible because the sale is perceived as being of good “value.”

Yet, when looking at investment funds, this phenomenon seems to lose its magic. Instead of clamoring to buy, when a fund temporarily loses its value, investors often question what’s wrong. What’s wrong with the manager, the strategy or investment thesis; they question the very fiber of the investment. While this is absolutely within their rights, and part of sound investment strategy, the question is, why does this typically happen to investment funds? 

Just like any item, there are ideal times for a fund, and times that are going to be challenging. All investment strategies have periods of highs and lows. When looking at long funds for instance, there are going to be down periods when the market corrects, and long/short funds can face strong headwinds when markets whip up or down. At times, trends and volatility are even less than ideal for quantitative funds that are agnostic to price direction or asset type.

However, the benefit of investment funds is clear: they are generally based on sound risk management. Not only are most more balanced bets beyond a single stock or sector of the market, but the risk controls in place typically prevent the massive losses that you see in single stock investments. Simply, most funds do not have pullbacks as deep as single stocks or equity benchmarks. For instance, while the S&P's worst pull back is 53%, the Barclays Hedge Fund Index and BTOP50 CTA Index have only ever experienced a dip of 24% and 14%, respectively.

So, just as before, when you see an investment fund pulling back, consider the following:

·         Is the investment thesis valid;

·         What has challenged the strategy;

·         Is the strategy no longer valid or is this likely temporary;

·         Does the strategy have solid risk controls in place to control pullbacks/drawdowns; and

·         Does the investment provide good value?

If you are comfortable with the answers, perhaps this time categorize it as being “on sale.” Rather than chasing returns, chase good strategy and management, and if you find it on the cheap, all the better. 

See disclaimer.

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Broad Commodity Futures Excess Return Index (ABCERI): The Auspice Broad Commodity Index aims to capture upward trends in the commodity markets while minimizing risk during downtrends. The index is tactical long strategy that focuses on Momentum and Term Structure to track either long or flat positions in a diversified portfolio of commodity futures which cover the energy, metal, and agricultural sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess return (non-collateralized) versions.

Returns for Auspice Broad Commodity Excess Return Index (ABCERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The Bloomberg Commodity (Excess Return) Index (BCOM), is a broadly diversified index that allows investors to track 19 commodity futures through a single, simple measure. Excess Return (ER) Indexes do not include collateral return.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7. For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

Are Commodities Done?

Are Commodities Done?

Of course as soon as I write that title, I chuckle. So many times in my career, I have heard the extreme statements that a commodity will never move lower than price X or higher than price Y.   A recent example comes up often that the advent of commercial electric cars will eliminate the demand for fuel and thus oil.  Even Elon Musk has to laugh at that because what do you think powers his SpaceX rockets, pixie dust?

A common criticism is that commodities do not have the same yield or inherent return as equities and thus do not make sense to use in an asset allocation mix.  This may be true, but that does not make including commodities in an asset allocation mix less important. In fact, the opposite is true given commodities are non-correlated to equities and bonds. For example, the correlation of the Bloomberg Commodity index to S&P500: 

Yet, we believe the best way to use commodities in your portfolio is to use a tactical strategy. Being long select commodities as they rise, in cash as need be, and perhaps short as they fall. By doing this, one can lower that correlation even further.

For example, if you compare the Long/Flat Auspice Broad commodity index which takes tactical long positions in rising markets and to cash in falling markets, the correlation to S&P drops versus a long-only index:

The portfolio benefits are obvious: Including ABCERI in a diversified portfolio may improve overall performance while reducing volatility and drawdowns. This example shows an 18% improvement in annualized returns, 39% lower drawdown and 26% lower volatility (relative)

So when is the time to add commodities? Timing is always challenging and commodities have been sliding for the better part of 5-6 years.  But as the chart below shows, commodity versus equity values have long cycles.

 

 

Given there is no specific floor, this value could fall further. However, given it has become so stretched we believe that the equity values are more at risk near term than commodity values. In fact, as the following charts show, the recent commodity performance is at the bottom end of the statistical distribution while equity is at the top.

(*Source Bloomberg and Summerhaven Investment Management)

The world is still growing and the developing Asian markets are not going away. The demand for fuel, food, materials is not disappearing. In fact, demand may become greater than supply as the developed world shifts investment into technology inspired sources and investment dollars become harder to come by for traditional commodities. Moreover, commodities cannot go bankrupt. Remember, a stock can literally disappear, while it is not likely for most major commodities anytime soon.

On a stand alone basis, the recent returns from the commodity sector are underwhelming, but when combined with a typical investment portfolio the benefits are clear. Now is a good time to look at commodities in an asset allocation mix. Consider ways to directly participate in commodities versus resource equity to reduce the stock market risk and beta. Look for tactical managers that specialize in commodity tilted investments.

See disclaimer.

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

Auspice Broad Commodity Futures Excess Return Index (ABCERI): The Auspice Broad Commodity Index aims to capture upward trends in the commodity markets while minimizing risk during downtrends. The index is tactical long strategy that focuses on Momentum and Term Structure to track either long or flat positions in a diversified portfolio of commodity futures which cover the energy, metal, and agricultural sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess return (non-collateralized) versions.

Returns for Auspice Broad Commodity Excess Return Index (ABCERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

The Bloomberg Commodity (Excess Return) Index (BCOM), is a broadly diversified index that allows investors to track 19 commodity futures through a single, simple measure. Excess Return (ER) Indexes do not include collateral return.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in S&P 500, 40% investment in Bloomberg Barclays US Aggregate Bond Index, rebalanced annually, monthly data.

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7.

For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

What is Conservative Investing?

As we talk to investors and advisors, the phrase "conservative investing" comes up a lot. It is an often cited reason for avoiding non-tradtional or “alternative” assets.

It comes up fairly universally. Banks, mutual fund companies, industry experts all make reference. In fact, the largest advisors, the banks, harp on this a lot. They say things like "we keep it simple" or "we believe in conservative investing".

When pressed as to what conservative is, it generally refers to an approach that is a low risk combination of stocks and bonds. The reality is this is false. It is not conservative at all.

First, if you look at a so-called “conservative” portfolio of stocks and bonds, 60/40*, the corrections are still violent. The strategy has a very high correlation to stocks at 96%. It makes money and loses money at the same time. See Chart #1.

  Chart #1

Chart #1

Second, if you look at a reputable balanced fund, the epitome of "conservative", historically it produces a better risk adjusted result and better Sharpe Ratio with lower volatility and drawdown for about the same return. See Table #1 for a performance comparison.

  Chart #2

Chart #2

Yet it should be noted that the correlation to the S&P remains high at 85% (see Table 3). Scary that there is a massive amount of people’s savings managed this way. Some of the largest asset management companies have over 60% of their assets in these type of funds.

Lastly, in this case we have added a diversifying CTA benchmark, the Auspice Managed Futures Index (AMFERI) to the typical Balanced Fund. This is a return stream with a slight negative correlation to the stock market, 60-40 and the Balanced Fund per Table #3.

  Chart #3

Chart #3

Per Table #2, we have achieved significantly better risk-adjusted returns: lower volatility (-25%), drawdown (-58%) along with higher return (+10% relative) and Sharpe Ratio (+39%). It is only in this case that correlation of the combined result is far lower than investing in the stock market or 60/40 portfolio alone.

Per Table #3, combining this Balanced Fund and the CTA Index produces now produces a modest correlation of 56% to the S&P. It also produces the highest Sharpe ratio and lowest drawdown and volatility. It is the best risk-adjusted return per Table #1.

The example is simple. The reasons are obvious. It is actually conservative and reduces portfolio risk.

Some of the most successful and conservative investors, who's mandate it firstly to protect assets, are significant users of alternative strategies like that shown here. The Canadian pensions are a good example of this.

By adding non-correlated investments can you create a better, more conservative portfolio.

Check the definition of conservative at the door.

See disclaimer.

  Table #1

Table #1

  Table #2

Table #2

  Table #3

Table #3

Disclaimer
 

IMPORTANT DISCLAIMERS AND NOTES
Futures trading is speculative and is not suitable for all customers. Past results is not
necessarily indicative of future results. This document is for information purposes only
and should not be construed as an offer, recommendation or solicitation to conclude
a transaction and should not be treated as giving investment advice. Auspice Capital
Advisors Ltd. makes no representation or warranty relating to any information herein,
which is derived from independent sources. No securities regulatory authority has
expressed an opinion about the securities offered herein and it is an offence to
claim otherwise.

COMPARABLE INDICES
Auspice Managed Futures Excess Return Index (AMFERI): The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The strategy focuses on Momentum and Term Structure strategies and uses a quantitative methodology to track either long or short positions in a diversified portfolio of exchange traded futures, which cover the energy, metal, agricultural, interest rate, and currency sectors. The index incorporates dynamic risk management and contract rolling methods. The index is available in total return (collateralized) and excess (non-collateralized) return versions.

Returns for Auspice Managed Futures Excess Return Index (AMFERI) represent returns calculated and published by the NYSE. The index does not have commissions, management/incentive fees, or operating expenses.

Barclay BTOP50 Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. The BTOP50 employs a top-down approach in selecting its constituents. The largest investable trading advisor programs, as measured by assets under management, are selected for inclusion in the BTOP50.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry
grouping, among other factors. The S&P 500 is designed to be a leading indicator of
U.S. equities and is meant to reflect the risk/return characteristics of the large cap
universe. Price Return data is used (not including dividends).

60-40 Portfolio: 60% investment in SPY (S&P 500), 40% investment in IEF (intermediate-term US Treasuries), rebalanced monthly.


QUALIFIED INVESTORS
For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7. For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

What Investment would you pick?

Take a look at the following charts.  Which one would you buy?  (Note: They all get to about the same place in the end).

#1

#2

#3

Made your choice? then read on…

If you picked #1, you need to consider that despite great returns in the last 8 years, it has periodic drawdowns (pullbacks) of 50% plus historically. 

If you picked #2, you need to accept that while it did well in a number of periods, this investment also does pullback, often for a 2-3 year period. However, those drawdowns have been substantially small (roughly half) of Investment #1.

If you picked #3, you need to accept you may not get the highest returns in any period. Moreover, you may have periods when you underperform other investments.  However, to your benefit, this investment has a fraction (11% versus 50%) of the drawdown and volatility (7.7% versus 15%) of choice 1 and it gets to the same result.

So what are they?

1 is the stock market.

2 is Auspice Diversified.

3 is a 50:50 combination of 1 and 2.

See disclaimer.

#4

If overlayed, you can see the characteristic of each is different but complimentary.  All three get to about the same place at approximately 5% annualized (not considering fees), but they do it in different ways.  How to choose?

  • If you believe that an asset’s trend is the best indicator of the future, you might buy the one that has recently done well, #1.
  • If you have perfect timing, which none of us do, you might buy the one "on sale", #2.
  • If you recognize that trends come and go and that timing the market is almost impossible you should combine the two different things together (i.e Diversification), #3.

The benefit of the combined investment?

May 2017 Blog Analysis.PNG
  • Better return (3% relative)
  • 48% lower volatility
  • 79% less pullback (drawdown)
  • 56% better Sharpe ratio

What is the right choice for you?

If you interested in our help in improving your portfolio, please reach out. We can find the right combination for you.

 

 

Disclaimer

IMPORTANT DISCLAIMERS AND NOTES

Futures trading is speculative and is not suitable for all customers. Past results is not necessarily indicative of future results. This document is for information purposes only and should not be construed as an offer, recommendation or solicitation to conclude a transaction and should not be treated as giving investment advice. Auspice Capital Advisors Ltd. makes no representation or warranty relating to any information herein, which is derived from independent sources. No securities regulatory authority has expressed an opinion about the securities offered herein and it is an offence to claim otherwise.

COMPARABLE INDICES

*Returns for Auspice Diversified or “ADP” represent the performance of the Auspice Managed Futures LP Series 1. Performance for this example is calculated gross of all fees.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Price Return data is used (not including dividends).

QUALIFIED INVESTORS

For U.S. investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to Qualified Eligible Persons “QEP’s” as defined by CFTC Regulation 4.7. For Canadian investors, any reference to the Auspice Diversified Strategy or Program, “ADP”, is only available to “Accredited Investors” as defined by CSA NI 45-106.

Love and Economics

More recently than outrageous prices paid by royalty for Pineapples in the days of Columbus ($5000 in current dollars), research by Stanford Professor Baba Shiv illustrates that the brain actually responds more pleasurably to stimulus if it thinks the item is expensive versus cheap. This was illustrated using wine. If you tell someone it is expensive, their brain literally responds more than if they are told it is cheap. 

When we pay a lot for something, we enjoy it more because our brain thinks its better. But as the value, or perceived value fades, our passion fades away.  If something has real virtue and a low price, its perceived value is at risk. Historically, there was a strong correlation between price and value.  The price was driven by the bespoke/handmade aspects of producing goods and commodities. Transportation and communication was time consuming and costly. Technology changed this and now we don’t get excited about cheap things.  Think price of diamonds or caviar versus chicken eggs and flour.

Children offer us a more realistic perspective as they don't yet appreciate monetary aspects (cost).  Hence why a child often plays with the box an expensive toy comes in, rather than the toy itself

Society also seems to shun cheap things and celebrate the expensive. I believe this aided or exacerbated by "brand".  Brand implies quality and thus influences the price we will pay for something. 

This may partly explain why expensive mutual funds from companies with billions in AUM still sell yet new entrepreneurs in the financial space that create other more cost effective products have less assets.   The best move for the mutual fund companies is to try to use their brand to play catch up, with products like ETFs - and it may indeed work. For like expensive things, we are willing to pay more for perceived value from brand. 

At a boutique shop like Auspice, we know we can't compete with big brands. This is especially true given we don't have hordes of salespeople booking hundreds of meetings a day.  However, by creating products of value, for a fair price, we believe the evolution of the buyer will dictate the terms going forward.   The move away from high cost mutual funds to ETFs or low cost funds that reward performance is indeed occurring.

Moreover, the move from expensive financial advisors to Robo-advisors is another example of this.  It doesn't mean the traditional advisor doesn't add value. It means the market may only be willing to pay for the marginal cost of producing the good in the future.  And if the good is cheaper (ETF versus mutual fund), then new buyers may demand the alternative tool regardless of delivery mechanism or historically acclaimed brand.

I love Pineapple. But not at $5000. OK if its not Dole.

Better yet, I love to get a good deal on quality product, even if it’s a brand most don’t know. Yet.

 

 

Accretive - in Finance and Life – March 2017

Accretive is a word we use a lot at Auspice.   It is the process of improving something, making it better.  

While adding value gets talked about a lot across aspects of business, consumer products, services and even in the financial industry, it is a little different than being accretive.  “Added value” is about making the product more appealing.   For example, a jewelry business may use high end displays or wrapping. This may make customers willing to pay more for the product. It is an add-on or feature that gives the product a greater sense of value.

If you are an investment advisor, what sets you apart? Perhaps the added value of estate planning, insurance, or cash efficiency can separate your practice from the pack and low cost alternatives, but these things don't necessarily improve the portfolio for your client,— that is a little harder. If you are an institutional investor or think like one, the plan you represent (investor) doesn’t have the same need for the bells and whistles of added value services, but adding unique value to the portfolio is indeed critical.

When people talk about improving a portfolio of assets, we often hear about the added value. Anything that either makes the portfolio provide higher returns, or feel better for the investor could be called added value. Therefore, doing more of the same thing that is working right now (long equity) in a different (high-beta) wrapper is essentially "added-value". When we refer to changes to portfolios as being "accretive", it answers the simple question, "does this improve the portfolio?" This improvement could be in the form of better returns, or just as important, reduced risk (volatility, drawdowns), better risk metrics (Sharpe, MAR, Sortino ratios) or a combination thereof. To do this, the asset needs to be different; do different things at different times than what you were already doing – make gains at different times.  

In fact, the only real reason to add a new "asset" to a portfolio is to be accretive to what you have. Not more of the same. Not an extra policy or feature.  

When you are looking at your portfolio, or the one you oversee, how do you decide to add something new? Does it provide a diversification of risk versus simply a further diversification of capital (see January post on this topic here)  We believe that adding assets should not only be based on the obvious goals of increased returns, but that new assets should be accretive to what you already have.  It should enhance and improve the portfolio. 

This is no different than the walk of life. We are looking for things that actually improve our lives and how we live - in some way benefit society or leave the world a better place.  Like your investment portfolio, sometimes adding shiny things feels great for a while, but they don't matter that much in the end.

Be accretive. Or what’s the point?

The CTA VAI (Value Added Index) - a tool for timing and understanding the value of managed futures

The CTA VAI (Value Added Index) - a tool for timing and understanding the value of managed futures

It seems like clockwork that whenever an investment strategy goes through a soft period of lackluster returns, the investment community questions its validity. You can almost set your watch to it. This seems particularly true for strategies that are divergent in nature, the most common of which are managed futures/CTA strategies.

Divergent return streams are characterized by many small losses followed by an occasional large gain, often at times of crisis or correction. Unlike feel-good convergent return streams, which produce many small gains followed by an occasional devastating loss, divergent strategies often feel like taking many small paper cuts, waiting patiently for a possible large return. For this reason, retail investors often struggle with this type of strategy, as they do not provide constant gratification through dividends or yield, but rather feel like waiting for a huge insurance payoff.  

Seeing as most equity, fixed income and typical alternative (real estate, private equity, infrastructure) investment strategies produce a convergent return stream, one solution to creating a better portfolio, for any investor, is to add divergent alternative return streams to the typical convergent investments that dominate portfolios. Holdings that boast a negative or near-zero equity correlation but still produce positive returns over time are particularly valuable, as they’re able to still provide investors with moderate gains over the short-term, but really kick in once the markets decline.

 

To help understand the value of this return stream and managed futures in general, in 2014, we published a white paper on the CTA Value Added Index (“VAI™”), which illustrates that managed futures/CTA strategies consistently add risk-adjusted value not only in times of financial crisis, but over the long term as well, and that timing plays a significant role in improving portfolio performance when increasing risk-adjusted exposure.

A perfect example of this is gleaned from the graph above, which shows the additive risk-adjusted value of using managed futures within a portfolio. While the CTA VAI™ largely remained positive for the better part of two decades, in 2014, it briefly dipped into nega­tive territory before fiercely rallying over a short period of time on the back of exceptional CTA performance despite the continued strength of the stock market.  During this time, any investor who increased their CTA exposure was rewarded handsomely for their shrewd decision.

The best time to add CTA exposure is when the value of the CTA VAI™ has significantly dislocated from the S&P 500. This is why it is such a valuable tool to use when trying to time asset allocation perfectly in order to further improve portfolio performance.

At the time the CTA VAI™ whitepaper was written, the CTA sector had softened for three years and the investment "community" began questioning its validity as a result.  However, the paper illustrates that adding CTA exposure to a simple portfolio of equities was still valuable over most time periods. It didn’t matter whether an investor added exposure in a time of financial crisis or when stocks were outperforming: over a rolling 60-month period, the index was mainly positive. This illustrates that whatever the current performance of the CTA benchmark, there is still an additive long-term risk-adjusted benefit to including managed futures within a portfolio. 

Yet, despite the prevalence of long-term gains for portfolios including CTAs, timing shapes performance. Historically, the most valuable time to add CTA exposure is when the CTA VAI has significantly dislocated from the S&P 500 (grey sections in Figure 1 above in 1998, 2000, 2007, and 2014).

In 2016, with very few exceptions (all of Auspice’s products were positive), CTA strategies did not fare well while the equity market marched higher. This led to a widening of the spread between the index and S&P. Currently, the index’s value is still significantly dislocated from the S&P 500, sitting on the low end of the historical range at 1.16.

While this index does not predict the future, we can learn from facts from the past. At this time, the spread between CTA Value added Index and equities is starting to look stretched. Could it widen even further? Of course. However, it is at times like these that adding a divergent return stream seldom harms a portfolio materially, with the potential to help tremendously. 

Capital versus Risk Allocation – what most investors get wrong with diversification - January 2017

There is one aspect of investing that most retail and institutional investors get wrong, a lot, and that is diversification. We see it all the time. While it starts in a place of diligent thought and effort, it is important to recognize that diversification, as many understand it, expresses an old approach to investing that may not actually shield investors as intended. Even though portfolios are typically built on the basis of diversifying capital across assets, this does not necessarily diversify risk. To properly diversify a portfolio, it is important to separate capital allocation from risk allocation – they are not the same thing.

Most commonly, investors believe that diversifying assets across traditional fixed income, equities and non-traditional assets is a smart thing to do. While going beyond geographic diversification makes sense, investors should now realize that the addition of non-traditional "alternatives" are an important consideration when trying to protect a portfolio and prosper over the long term. 

Chart 1 – Capital and Risk Allocation of a Typical Portfolio

So what’s the problem?

Balanced asset allocation, even with a healthy mix of traditional and alternative assets, does not necessarily mean that a portfolio’s risk is diversified. Investors often make a concentrated bet on equity performance even though they have both types of assets due to their generally high correlation to the stock market. Essentially, as referenced in Chart 1, the diversification of assets could still have a significant concentration of equity risk.  

 Just look at this pension fund (see Chart 2). Despite seemingly being responsible and diversifying its assets, the returns it receives from its investments have a very high correlation to the stock market. The pension has lost and made money at the same time as the S&P with a correlation of 0.85 despite having a diversity of capital allocation.

 Chart 2

So why does this happen?  

The reality is, most investments, including stocks, bonds and even alternatives have a high correlation to the stock market. This includes the most common areas of alternatives such as Real Estate, Private Equity and Infrastructure, which have some of the highest correlations to the market. Other common alternatives like High Yield, Hedge Funds, and Equity Multi-Strategy, which typically have been the first stops outside of the "traditional alternatives,” also suffer from this problem.   

Chart 3

Of the alternatives listed in the chart above, only Currency, Commodity, Agriculture and CTA/Managed Futures alternatives have a low-to-negative correlation to the market. While many investors have heard of these asset classes, investing in them may seem opaque and complicated. However, there are a number of institutional offerings for each of these areas that can be taken advantage of, and recently, more and more choices are becoming available to even the retail investor and advisor. The one caveat to this is, in certain markets like Canada, these areas are definitely underdeveloped and used by only the most sophisticated investors, which in our view, is extremely unfortunate.    

Arguably, the most important alternatives of all are the ones with a slightly negative correlation to equities because alternatives are largely intended to shield investors and diversify risk. This is commonly understood to be only available within the Managed Futures space. So what is it about this return stream that adds value to a portfolio yet has a negatively correlated return?

The answer lies in the fact that risk taking strategies can be broken down simply into two types – convergent and divergent. 

 Convergent return streams are most common, producing a return stream that is characterized by many small gains with an occasional devastating loss, as markets grind higher slowly for long periods of time with the risk of a sharp correction. This type of return stream is a “human” feel good strategy, as it gives investors constant gratification, often through yield or dividends, follows logical sense and is based in fundamentals. Whether classified as an alternative or not, the returns experienced under this stream will look a lot like that of an equity market and encompass both active and passive investment strategies. The reality is, most alternatives are this way, and as such, they do little to help your portfolio in difficult times as you get more of the same type of return stream.

In contrast, divergent return streams are less common yet are very valuable as they produce returns differently and at different times when compared to most investments. They are characterized by many small losses followed by an occasional large gain, often at times of crisis or correction. Unfortunately, they are not "feel good" strategies. In fact, to many, they feel like taking many small paper cuts, waiting patiently if possible for gains. These strategies go against the human need for constant gratification and are typically not based on fundamentals in order to produce an atypical return stream.  They are most often based on a repeatable process that is systematic, with fundamentals and no biases, ultimately producing returns that are generally derived from trend following. The most common strategies under this umbrella are Managed Futures/CTA investments.

As one can see, the real solution to creating a better portfolio, for any investor, is adding divergent alternative return streams that have a negative or near-zero equity correlation but still produce positive returns over time.

A better portfolio should be judged from a risk perspective, not just a capital allocation view.  To reduce portfolio risk while potentially increasing the opportunity or reward, the return stream should be accretive to what you may already have. From this perspective, there is no sense in adding more equity risk, as you’ll always land on the same problems when the markets correct

Want to see how correlated your portfolio is to the equity market? It is not overly complicated, all you have to do is run a correlation between your portfolio’s returns and the stock market, then look at the correlation of the components that make up your portfolio. Do you have any that are of low correlation to the equity market?  Hopefully you do. Perhaps you hold a commodity fund, agricultural play, or currency strategy. However, for most retail and institutional investors, this area is often overlooked despite their clear advantages. All you have to do is look at the chart below which illustrates the advantages of adding an investable CTA Index like the Auspice Managed Futures Excess Return Index (AMFERI) to a diverse portfolio of traditional and alternative asserts. The improvement is obvious, with not only better returns, but better risk-adjusted returns with a higher Sharpe ratio and lower volatility and drawdowns. 

The good news is these strategies are now available to both institutional and retail investors through not only private hedge fund structures, but mutual funds and low cost ETFs. 

It is only with these types of additions that one can diversify risk and really take advantage of the unknown while still having the opportunity for gains if the seemingly unflappable equity market keeps rallying – or just as likely – fails and reverses

2016, 2017 and Reducing Risk - December 2016

2016 was a year of volatility inducing events, which caused many markets to move in surprising ways on the back of results that separated themselves from popular consensus or polling. Brexit, the US election, a new OPEC narrative, and the US Fed raising rates were all tough on trends, inducing whips and reversals. Despite this, equities rallied while broad commodities had their first positive year in many, and we are proud to say that all Auspice strategies and funds made gains in 2016.

Despite the irony of Trump’s glitter, gold lost its luster, the US dollar soared, and rates rose. This all came after oil rallied for most of the year, copper became king, and natural gas moved over 50% from its lows even though many called it a dead market. Notably, WTIrose 85% from its January lows while Canadian oil, the largest foreign supply barrel to the US, rallied from 15.76 to 38.59 (as per the Canadian Crude Index Reference Price), gaining 145%. The stock market even remained unstoppable after an unlikely presidential candidate was elected to power. Canadian equities led the world, rising over 17% in 2016, which was the biggest increase since 2009, and the US market was on fire with the S&P500 gaining 9.5% on the year.

If the year has taught us anything, what stands out is being different and not following the pack in consensus or action. While typical "hedge funds", as ironic as that sounds, struggled, not all were negative. Our CTA and commodity investment strategies were positive this year, continuing to outperform at key times in 2016 when other CTAs underwhelmed expectations. The reason for this is because, at Auspice, our business model is different, our culture is different and thus our returns are different. We are very proud of these differences, results and added value. However, what makes this year such an accomplishment is how hard it was to achieve success given the unforgiving market conditions. Many CTAs were not up - not even close. To be successful, it took character and resilience, along with agility and rock-solid risk management.  

Looking forward, 2017 seems like a year that will be full of political risks and surprises. With elections coming in the Netherlands, France and Germany, and a clear lack of reliable polling, the populist movement is providing volatility from a seemingly unlikely place. Oil supplies are vulnerable to political risk, as production is concentrated in a small number of countries, many of which are unstable. Domestic turmoil and conflict have disrupted supply from Nigeria, Libya and Venezuela in the last year, while the oil-producing Gulf States and Iran are politically and militarily tense.  Moreover, with the approval of a pipeline to the west coast, for the first time in history, Canada has gained approval to move oil to tide waters and find new buyers in Asia instead of dumping 99% of its exports into the US. Essentially, the markets appear in for an unknown path.

So how do you capitalize on this? Maintain the course and stay disciplined. We think it is critical to be agnostic and remain tilted to the opportunities that the commodity and financial markets provide. While no one knows where the markets are headed, we will continue to simply be trend followers. This will be a year that starts with a bang due to an unbounded number of political narratives globally. Therefore, it will be important to separate capital allocation from risk allocation. If investors continue to focus on proper portfolio construction, the environment could be very profitable.

While portfolios are typically built by diversifying capital across different assets, this does not necessarily diversify risk. Often, we see seemingly diversified portfolios that are really just a concentrated bet on the equity markets due to their high correlation and volatility to these assets. While these portfolios look diversified, even using typical alternatives such as infrastructure, real estate and private equity along with "hedge funds", they tend to be overweight on equity risk by 80-95%. In fact, most "alternatives" have a high correlation to equity, which is why one should really research potential holdings, especially in the new year where it will be important to do the right thing instead of  the same or easy thing.

To really take advantage of the unknown, we suggest adding strategies with a low, or ideally, slightly negative correlation to equities. By our analysis, this is limited to currency, commodities, agriculture and CTA/managed future alternatives with the only negative correlation being the latter. It is only with these types of additions that one can reduce risk while still having the opportunity for gains if this seemingly unflappable equity market keeps rallying -- or just as likely -- fails and reverses.

All things come to an end. That’s what 2016 really taught us, and that is all you really need to know for 2017.

Good luck.

Trump and Natural Gas – the similarities - November 2016

There are a number of similarities between Donald Trump and Natural Gas.

Not only are both a surprise, seemingly sneaking up on us this year to rise to prominence, but like the rhetoric espoused by the president-elect, gas is plentiful and will not go away anytime soon. Even with the odds stacked against them; both have managed to make significant headway in a seemingly improbable, if not impossible way, leaving many bewildered to say the least.

Natural gas is the commodity I started my career on. Some may be surprised by that, but the reality is that it’s a commodity that teaches you risk management and respect for the markets like no other. Gas helps you to remain agile in your thoughts and views as much as your trading discipline. You need to think outside the box, and cannot solely rely on historical performance, because the commodity can move faster and further than you’ve ever imagined.  

I remember when people saying that gas could never surpass $5, $7, $10 or even $12, but it did. Even after it defied all expectations, they said it could never fall back down to $2, but it did as well. Like Trump, many investors are generally unable to fathom gas’ trajectory simply because they act on emotion and do not recognize, or simply choose to dismiss, the underlying momentum propelling the commodity further.

This is why the commodity can be so helpful in teaching investors the value of momentum and trend. Gas makes you learn when to take your chips off the table when risk gets out of line, and can often remind investors that any trend can have its fair share of bumps along the way. When this happens, the best possible recourse is usually to be patient and give your holdings space, looking at them objectively and not allowing emotion to enter into the equation. This is not unlike the Trump campaign, which had momentum on its side, yet had to resiliently hang on through many rough patches in order to secure a win at the end of the day.

When looking to the commodity, given that we started the winter season without weather to support price, gas corrected sharply in October. While this was not unexpected or unhealthy seeing as gas rallied for the better part of 6 months, the news led many to say that winter was over before it even began, causing some to dismiss the commodity altogether. Yet, what happened? Gas continued to hang on despite the bearish news.

At the first sign of winter, the commodity rallied sharply, gaining over 25% since early November. It was simply too early in the heating season to throw in the towel. As always, winter will come, and like Trump, many may not like it, but it is a reality. We just have to deal with it and try to use the underlying trends to our advantage.

Now, with high storage levels, the nature of the gas market’s underlying balance is completely different than it was a year ago. The U.S. domestic supply is currently running close to 2 Bcf/d lower, and demand is also somewhat different with gas-fired power generation more entrenched, industrial demand picking up, and exports of LNG ramping up. Furthermore, Bentek released a study which suggests that if there is no rebound in northeast drilling activity in 2017, northeast gas production may be more than 3 Bcf/d lower than current output levels next year.

So how do you take advantage of this? At Auspice we believe if you have a view on a commodity, find an instrument to express that view directly and cleanly. For this, we recommend commodity-based ETFs, the easiest and most effective way for most investors to express a “pure play” opinion. If you have a view on oil or natural gas produced in Canada, the largest foreign supplier to the United States, pick an ETF that exposes you solely to that commodity.

The rewards may be there – if you look at the performance during the summer season (April through October), the Canadian Gas Index (CGIER) rallied over 36%. While some resource based “gassy” equities have performed as well or better than the commodity itself, these are few and far in between, and can be very hard to distinguish given that they are tied to a myriad of other factors. Even well regarded products like junior natural gas producer ETFs underperformed the commodity itself during this period given their other non-commodity related characteristics. 

How does this all relate to Trump? While his performance as President is yet to be determined, and he has shocked, surprised, and exploded into reality, make no mistake, he isn't going away. Just like trends in gas, it is important to understand reality versus rhetoric and adjust your plans accordingly. Don't simply hide and ignore the information right in front of you. This can hurt you.  If you have a view, take it square on and manage the risks accordingly. All it ever needs is a catalyst to explode!