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The Auspice Diversified Program was down 2.23% in February.
While the last couple months provided good opportunity, February was challenging and a time to play defense. During February, we cut risk in all long equity positions and exited some markets entirely. While we are still long, this is to say that we believe the probability of keeping our equity gains is diminishing and reducing our risk and crystallizing some of the gains is prudent.
SYNOPISIS OF DRAWDOWN ANALYSIS
Managed Futures is typically a difficult strategy to time because of the non-correlated performance that results from the widespread diversification of market sectors covered. One of the best ways to consider an entry point is through an understanding of drawdowns over time. Pullbacks occur in every strategy, however given transparency of the returns, it is intuitive to analyze the character of the pullbacks and subsequent gains with managed futures. These pullbacks generally represent an opportunity from which trends develop and extend. Furthermore, the time to make new gains is often quicker than the length of the pullback (peak to valley).
We also exited long positions in some commodities and currencies. Commodities were notably weak on the month making up over 75% of the loss. However, it should be noted that by being agile and protecting capital, the strategy outperformed long commodity indices, many of which were down 4-6% (Ex GSCI down 4.39%). We are optimistic commodities may provide opportune trends in the near future and corrections like this are a normal part of our strategy. In the meantime, we focus on risk management and the overriding goal of capital preservation.
While we don’t know the direction of the traditional equity and fixed income markets, what investors need is an insurance policy that will pay off at times when the inevitable pullbacks occur. In our opinion, Auspice Diversified Program is better than insurance in that it also has a good chance of making money when you need it most and at least not losing much, at other times. Overall, your total portfolio has less risk and more chance of making money over the long term by adding a non correlated investment. You wouldn't drive a car without insurance and you shouldn't invest without it either.
For those interested in an updated copy of an analysis of the drawdown and recovery periods for Auspice Diversified, please contact Auspice. A quick synopsis can be obtained here (right), which highlights the environment and the opportunity. The current environment is an opportune time to be adding to this type of an investment.
Interesting Trades:
The Auspice Diversified Program was profitable in 1 of the 7 sectors traded and flat in 1 other. Although, the strongest market was Equity indices, we reduced risk and crystallized some of the gains as the risk/reward of staying in this trade has shifted. After a strong start to the year, commodities and commodity related currencies also lost momentum in February.
- Risk reduction in all long equity index positions including S&P, Russell 2000, Nikkei, CAC 40 Paris and exited Hang Seng completely crystallizing this uptrend gain.
- Profitably exited long position in Aussie dollar.
- Reduced risk in other currencies including Swiss Franc and Euro.
The 5 year statistics (Mar 08 - Feb 13) are: +0.96% annualized return with 11.05% volatility. The worst drawdown for the period is 20.96% with an average Margin to Equity ratio of 6.21%. It should be noted that during this 5 year period, Auspice Diversified remains ahead of the benchmark industry index. The Newedge CTA index is +0.88% annualized over the same period.
Most global equity markets remain down to small positive (-2% to +3% annualized range) with 35-50% more volatility and deeper drawdowns of 40-55%. Over the long run, the performance of the Auspice Diversified Program highlights not only the non-correlation and absolute return characteristics of the strategy, but the lower risk profile versus traditional investments due to stringent risk management and downside protection.
The close parity in returns of the equity markets and Auspice strategy represents an excellent entry point historically, and the team at Auspice is investing at this time.
Key Points Regarding our Positions
Energies: The sector was not profitable led by aggressive corrections lower in Gasoline and Heating Oil. Crude had been on the sidelines but we entered a short position during the month which offset and participated in some of the move down. We remain short Natural Gas but this did not provide much help during the month. This continued choppy behavior is challenging, and the sector is long overdue for trending behavior.
For those with specific interest in this sector, please contact Auspice regarding the launch of our Energy focused strategy. The program went live on March 2nd, 2012.
Metals: Metals were universally weak in February. While we remain long Palladium and flat Gold, we have added a new short in Copper. This sector has been choppy and we are testing for direction and opportunity either way.
ADDITIONAL REFERENCES
- A recent article in Advisors Edge dispels some of the myths regarding Managed Futures.
- For those interested, Michael Covel, a leading author specializing in Managed Futures and trend following, interviewed Tim Pickering on his background and the unique aspects that make Auspice a Next Generation CTA. Listen to the podcast through iTunes.
- Additionally, for those interested in more ideas about investing in alternatives, please check out www.amfmblog.com.
Grains: Grains were negative on the month and a couple positions were changed. While still holding a long position in the stronger Soybeans market, we have exited Corn to be flat and entered a new short in Wheat. By our definition, with the exception of Wheat, the Grains remain in long-term up trend.
Soft Commodities: The Softs sector was negative on the month. We re-entered a short in Coffee for a gain while exited a re-entry in Lumber from the long side for a loss. This position was quickly stopped out as it eroded alongside commodities in general. Cotton was the strongest in the sector, and we are close to a newlong position.
Currencies: The Currencies sector largely reversed aggressively lower vis-à-vis the US Dollar but we managed to exit our long Aussie dollar position profitably. We also exited long positions in Swiss Franc and the Euro while holding short in Japanese Yen. We have added a new short in the British Pound. We remain on the sidelines in the Canadian Dollar which was also weak alongside its commodity currency counterparts. We have taken a new long position in the US Dollar Index in the wake of this transition to US strength.
Interest Rates: After January’s big shift in Interest Rates, where we exited all long positions and completely crystallize the multi-year gains made in this sector, we have added new long positions in 5 and 10 year Notes. This sector was flat on the month.
Equity Indices: Risk was reduced in the long equity markets which have been very profitable over the last 4 months. During February we reduced long positions in the S&P, Russell 2000, Nikkei, CAC 40 Paris and exited Hang Seng completely. We have remained flat the Nasdaq since October 9th, 2012. This market has not moved higher with the other global equity benchmarks. Equity sector was profitable in February.
While we do not aim to call tops in markets, we believe in selling assets where we believe the probability of keeping our gains is diminishing. As with any disciplined asset allocation strategy, we move to sell overvalued assets when the risk is out-sized. In this case, equities fall in this category and reducing our risk and crystallizing some of the gains is prudent.
*Returns repesent the performance of the Auspice Managed Futures LP Series 1.
Most global equity markets remain down to small positive (-2% to +3% annualized range) with 35-50% more volatility and deeper drawdowns of 40-55%. Over the long run, the performance of the Auspice Diversified Program highlights not only the non-correlation and absolute return characteristics of the strategy, but the lower risk profile versus traditional investments due to stringent risk management and downside protection.
The close parity in returns of the equity markets and Auspice strategy represents an excellent entry point historically, and the team at Auspice is investing at this time.