Auspice Managed Futures Excess Return Index (AMFERI)
January was a mixed month for trend following and managed futures strategies. The AMFERI was slightly positive in a month where the bulk of opportunity came from the equity markets, an area not included in this index. This is a central feature of the strategy and its intention to provide non-correlation to equity biased portfolios.
As such while it appears that market participants are comfortable that the “Fiscal Cliff” has been averted, resulting in an equity rally, the goal of the index remains to follow sustainable trends across multiple assets. Moreover, it is important to point out that while policy and central bank intervention have caused overall choppiness in the diverse global macro sectors represented within the index, this is not always the case.
While the strategy results may slightly lag in moments of times of singular equity sector performance, the opportunity to provide non-correlation and payoff is possible given the strategy's disparate assets and non correlated performance over the long term.
The performance of AMFERI versus both investable and non-investable managed futures indices has been good. Since the launch of the index in December 2010, AMFERI continues outperform on both an absolute and risk-adjusted basis.
As previously highlighted, pullbacks happen within all strategies; however with managed futures such drawdowns can be an opportune time for investors. Investors should consider the drawdown history of their preferred strategy and gain expectations for potential payoff on recovery and extension.
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).
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For those interested in a copy of an analysis of the drawdown and recovery periods for AMFERI, please contact Auspice. See synopsis to the right.
The AMFERI was up 0.08% in January and was highlighted by a number of position changes further highlighting the period of transition.
In January the index was up in 2 of the 5 sectors. The strongest sector was Energy followed by Currencies.
The most challenging sector was in Interest rates as the strategy moved to short Interest Rate futures across the curve (US 5, 10 year Notes and 30 year Bonds). While negative in attribution on the month, this crystallized significant long term gains.
Commodities had a positive attribution led by Energies with Metals and Ags down slightly.
The Currency sector also was positive on the month led by the short in Japanese Yen and Long Euro.
The index is currently positioned long in 5 of 12 commodity markets, having flipped to short in Natural Gas and Soybeans in January. The index is now tilted short in the financial markets with 7 of the 9 components holding a short weight. Within Financials, Currencies have now tilted short adding short British Pound and Canadian Dollar weights during the month. Interest rates components are now all short.
The weights remain the same - long Gasoline and Heating Oil, short Crude Oil. The petroleum markets are again stronger overall ending January whereas Natural Gas was the outlier and weak.
While the strategy flipped to a long weight in Natural Gas in July 2012 then crystallizing a very profitable short trade, this trend did not extend, As such, the strategy has taken on a new short here.
The index holds the same long positions in Gold and Silver as ending 2012 while remaining short Copper. The Metals sector has lacked trend commitment for some time although Silver was profitable on the month.
The Ag sector was modestly weaker again led by the Grains. Soybeans were exited during January to now be short the three Grain components. Cotton continued to add value from the long side and was the largest contributor of all components (both financial and commodity). Sugar has continued weak during the month the index remains short for a gain.
Within this sector, the index is now tilted to take advantage of higher interest rates (short bonds). Long positions had been in place since May 2011 and the bulk of the last 5 years as interest rates fell and have remained low. The sector has been a very profitable weighting for the strategy that has now been crystallized.
As in December, Currencies made sector gains in January. The most significant gain came from the short in Japanese Yen complimented by the long Euro weight. Small gains came from long Aussie and short US Dollar Index. The strategy changed to short weight in both the Canadian Dollar and British Pound both which made new lows on the month.
Patience: It is important to recognize the value of the managed futures sector is to provide long term absolute return, asset diversification and non-correlation. Given the overall market environment has been very good, especially the performance of the traditional equity and fixed income sectors in the last couple years, Managed Futures remains an excellent addition to diversify an investment portfolio. You wouldn’t drive a car without insurance, and you should remain committed to low cost and transparent ways to get managed futures exposure as well.
Strategy and Index
The Auspice Managed Futures Index aims to capture upward and downward trends in the commodity and financial markets while carefully managing risk. The index will use a quantitative methodology to track either long or short positions in a diversified portfolio of 21 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 as either a total return index (includes a collateral return) or as an excess return index (no collateral return).
About the Index Provider
Auspice is an innovative asset manager that specializes in applying formalized investment strategies across a broad range of commodity and financial markets. Auspice’s portfolio managers are seasoned institutional commodity traders. Their experience, trading one of the most volatile asset classes, forms the backbone of their strategy for generating profits while preserving capital and dynamically managing risk. Auspice Capital Advisors Ltd. is a registered Portfolio Manager / Investment Counsel / Exempt Market Dealer in Canada and a registered Commodity Trading Advisor (CTA) and National Futures Association (NFA) member in the US.
Auspice’s core expertise is managing risk and designing and executing systematic trading strategies. Auspice uses its diverse trading and risk management experience to manage 4 diverse product lines. and has been described as a “next generation CTA”, offering strategies in active managed futures (CTA), passive ETFs, enhanced indices and custom commodity strategies.