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The Auspice Diversified Program was down 2.38% in November.
While experiencing a loss on the portfolio, the gains made came from a part of the market that has been challenged for some time. The volatility in the market and flipping between “risk on” and “risk off” has been centred in the financial sectors for some time now. Gains in the portfolio from trends came precisely from these sectors – Interest Rates, Currencies, and Equity Indices. It has been since early 2011 that these 3 sectors lined up to all provide trend opportunity by our definition.
The commodity portion of the portfolio remained challenging to capture trends with markets generally dropping in the first half before partially recovering later in month.
Of special note, 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 drawdown opportunity.
For those interested in more commentary on timing in the CTA/managed futures sector, we would highlight a couple posts on our blog. The first is entitled “The opportunity in CTA/Managed Futures drawdowns” which is a great article that revisits a classic analysis by a legendary trend trader, Tom Basso.
As an extension to that research, 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 (top text), 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 3 of the 7 sectors traded. Gains were made in the 3 financial markets, Interest Rates, Currencies, and Equity Indices. The 4 Commodity sectors had net losses led by weakness in the Grains and Softs.
- Exited a profitable short trade in Copper that was entered in October.
- The long Lumber position has continued to benefit the portfolio.
- Covered a long Wheat position that was only on for a few days. The wheat market remains very tight and range bound.
The 5 year statistics (Dec 07 - Nov 12) are: +5.58% annualized return with 12.98% 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 benchmark Newedge CTA index is +2.00% annualized over the same period.
The global equity markets remain down (-1 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: Energy was choppy largely trading sideways. We remain short Crude, flat Heating Oil and Gasoline. Natural Gas provided a wild ride extending weakness started in mid October before rallying mid month only to sell off at month end. Unfortunately, this caused us to enter a new short in gas and exit before re-entering at month end. As such we leave the month with a short tilt in energy.
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 were mixed with Gold sideways but Copper and Palladium sharply higher. While we remain long Gold, the Copper short was covered into this strength for a small gain. We remain on the sidelines in Palladium. As mentioned last month, we felt a move was overdue and this should be an opportune sector soon.
- 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 started the month off weak led by Soybeans. We covered our Soybeans position for a small gain and hold the long Corn position. Wheat was entered long and quickly exited as the sector weakness was developing.
Soft Commodities: The Softs sector was challenging with markets moving sharply with an upwards bias. Lumber was sharply higher and we are long. Cotton was also strong against a new short entered at the start of the month. We are holding at the moment. OJ was also strong and we covered our short. Coffee on the other hand was weak where we are short for a solid portfolio gain.
Currencies: Solid gains made in currencies with only one portfolio change on the month. We remain long the strongest markets in Aussie and Canadian dollar positions. We are short the Euro and have added a new short in the Yen. We are on the sidelines in the Swiss Franc Dollar Index, and British Pound. Perhaps the new Bank of England Governor (Mark Carney of the Bank of Canada) will be able to inject some life into the Pound.
Interest Rates: The Interest Rates sector was profitable in November on the back of existing and new long positions. We have now added 5 year Notes and 30 year Bonds to our long standing position in US 10 years, held since early 2011.
Equity Indices: Lastly, we were also profitable the Equity sector where the market traded lower following the US election before gaining back some ground at month end. After noting last month we were holding one of the strongest markets in the Hang Seng, we have now taken profits. The Hang Seng adds to our flat positions in the Nasdaq and the Nikkei. We continue to hold long positions in the French CAC 40, the Russell 2000, and the S&P 500 with significantly reduced exposure since the summer. While the sector has not eroded completely, the stronger markets have softened significantly in the last 2 months. It appears additional upside momentum has been lost and we are happy to crystallize gains in this sector.
*Returns repesent the performance of the Auspice Managed Futures LP Series 1.