Download the Commentary here.
The Auspice Diversified Program was up 0.81% in December.
After a period of pullback in the portfolio since June, the Diversified program has started to find opportunity once again. There have been a number of factors we can guess may have caused the “risk on” and “risk off” market behavior in 2012: speculation re China’s growth, the US election, the so called “Fiscal Cliff”, and many others. While each of these things may have contributed to choppy market action, there have been gains made and trends captured. Financial markets have been opportune this quarter and perhaps show a sign that markets are starting to normalize. Now that the “Fiscal Cliff” is behind us, we anticipate the disparate asset classes that provide the unique opportunity in managed futures (and trend following in general) will yet again show their diversification benefits. After a particularly challenging September to November, the commodity portion of the portfolio brought more opportunity in December,
As mentioned last month, we would also like to point out that Auspice is currently buying into the strategy at the corporate/manager level. We believe this is a very opportune time for investment similar to what we experienced in mid 2007. Our investment is thus increasing from our previous commitment as we take advantage of the current opportunity.
Many market participants also agree that the timing is favourable. Assets have grown at Auspice and in a recent article regarding institutional investors (check out our blog post here), it was highlighted that:
- "Year on year, more investors are adding CTAs to their portfolios of alternative asset funds in order to tap into this diversified liquid source of alpha.
- “….more assets have gone to CTAs than any other hedge fund strategies since 2008.”
For those interested in a copy of an analysis of the drawdown and recovery periods for Auspice Diversified, please contact Auspice. A quick synopsis can be obtained here (below), which highlights the environment and the opportunity. The current environment is an opportune time to be adding to this type of an investment.
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).
The Auspice Diversified Program was profitable in 4 of the 7 sectors traded. Gains were made in 2 of the financial markets, Currencies and Equity Indices as well as 2 of the Commodity sectors: Energies and Softs.
- Generally holding profitable trades into end of month.
- Natural Gas short benefited the portfolio significantly.
- The long Lumber position has continued to benefit the portfolio.
- Gains from short Japanese Yen while being long the Nikkei stock index.
- Gains in short Coffee.
The 5 year statistics (Jan 08 - Dec 12) are: +5.27% annualized return with 12.95% volatility. The worst drawdown for the period is 20.12% with an average Margin to Equity ratio of 6.3%. It should be noted that during this 5 year period, Auspice Diversified remains ahead of the benchmark industry index. The Newedge CTA index is +1.82% annualized over the same period.
The global equity markets remain flat to down (0 to -5% annualized) over this same period with 20-35% more volatility and deep 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.
Key Points Regarding our Positions
Energies: The sector was profitable while Energy rallied into month end after initial weakness and choppy action. Natural Gas was an island to provide gains as our short paid off. At month end we remained short Crude and flat Heating Oil but took a long position in Gasoline mid month. Sector to be watched closely.
For those with specific interest in this sector, please contact Auspice regarding the launch of our Energy focused strategy in collaboration with Pulse Capital Partners of New York. The program went live on March 2nd, 2012.
Metals: Metals struggled in December as the sector weakened early before a late year partial recovery. At month end, we were on the sidelines in Copper and Palladium while holding Gold. Palladium is stronger than the other markets and was added on the first day of the new year from the long side.
- Advisor.ca article dispels some of the myths regarding managed futures.
- Listen to a podcast interview with Tim Pickering, President of Auspice and Michael Covel, a leading author specializing in Managed Futures and trend following.
- For those interested in more ideas about investing in alternatives, please check out the www.amfmblog.com.
Grains: Grains were the most challenging in December and produced a loss. After trying Wheat from the long side in November, we covered quickly, a good thing as this market collapsed in December, The same story presented itself in Soybeans in December where we added a long position only to stop out. The long position in Corn was also covered and we are holding no Grain length at month end.
Soft Commodities: The Softs sector had a great month after a challenging period recently led by the long position in Lumber and short in Coffee. We have reduced some of the risk in Lumber near month end crystallizing some of this gain. Cotton continued to be strong against a short entered at the start of the November and we have exited. We are on the sidelines in OJ which is acting very choppy at the moment.
Currencies: The Currencies sector was profitable led by the short taken in Japanese Yen last month. We added a long position in the British Pound early in the month which was profitable as the market appears excited about the new Bank of England Governor in Canada’s Mark Carney as mentioned last month. Swiss Franc was also added from the long side and profitable. We remain long the Aussie and Canadian dollar positions. We have exited our short Euro position and are on the sidelines in the US Dollar Index.
Interest Rates: The Interest Rates sector was not profitable in December on the back of existing long positions in 5 and 10 year US Notes as well as 30 year US Bonds. Of particular note we have exited the 5 years in December and the 30 years in the first days of 2013 to only hold the 10 years.
Equity Indices: Lastly, we were again profitable in the Equity sector led by an explosive breakout higher in the Japanese Nikkei index. At the end of November it looked like this sector was faltering, however we are happy to eat humble pie and jump back on as the opportunity presented itself. During December we added (from long side) and were profitable in Nikkei and Hang Seng. We continue to hold long positions in the French CAC 40, the Russell 2000, all of which were profitable
*Returns repesent the performance of the Auspice Managed Futures LP Series 1.