We are very happy to report a strong result in the often challenging July summer month of +2.16%. This year, July had similar volatility to previous years along with the added global financial unrest due to US debt issues and a weakening equity market. The resulting erosion of investor confidence and concern over a weakening market gave us pause in June and was capitalized on in July across numerous asset classes. Moreover, it illustrates that the key benefit of managed futures/CTA programs is non-correlation. It is not a strong negative correlation, but more of a low correlation that often produces very good results during times of financial unrest when diversification is most needed.
It should be noted that it is important for investors to remain invested or even add to these types of non-correlated strategies during these times. While an investor's first inclination is to reduce risk (as ours), it should be noted that reducing exposure to programs like Auspice at these times is precisely the wrong thing to do. Non-correlated investments have the ability to protect and benefit the portfolio specifically during these times (often described as "Tail risk protection"). Reducing a position in managed futures actually increases portfolio risk. If one is looking to reduce risk, lower the exposure to directional bets in equities, fixed income and other highly correlated asset classes. These traditional asset classes have been shown to become increasingly correlated in times of financial stress, while managed futures have been shown to provide consistent diversification. Take special note below to our recent changes.
There have been a number of media stories on the benefits of managed futures and one of particular note by Reuters who published an interesting article on Auspice and Managed Futures.
The choppy markets experienced in June did not last. While the equity markets have continued to sell off, even accelerating in certain markets such as the Canadian TSX, most other asset classes provided fantastic opportunity. With the exception of Equities and Energies, we were profitable in all sectors. While equities remained a challenge, the Energy market was just modestly negative. Considering the release of the US SPR (Strategic Petroleum Reserve) in June and the resulting choppiness that results from this type of intervention, we still see fantastic opportunity in this sector as we did in December through April.
Highlights of the month: In July, the Auspice Diversified Program was profitable in 5 of the 7 sectors traded. Profitable sectors included Interest Rates (see commentary below for specific important comments), Currencies, Metals, Grains and Softs.
Since full diversification (achieved in June 2007) the annualized return is now 12.5% with 13.6% volatility, 25-30% lower volatility than the Equity market. The equity market remains negative over this same period.
Interesting trades: During the month new trades were taken in Heating Oil and Gasoline. In Metals, we added Palladium while in Grains, we added Wheat. Currencies were notable as we covered a short position in the US Dollar Index. However, the most important changes are, as of this writing, we have reduced the risk in the entire interest rate sector (selling long positions in bonds and notes) and have completely exited the equity sector from the long side.
Key Points Regarding our Positions
Energies: Given the US uses the SPR very infrequently, every 5-10 years, we consider the release in June to be a good thing. It allows us to worry less as it is unlikely to occur again anytime soon. Regardless, the modest pullback in our strategy for Energy in June and July was within expectation and illustrates our disciplined approach to risk and capital allocation.
We remain flat the natural gas market. Note that this market still is in down trend but to reiterate from last month, "the risk reward was no longer in favour of being short at this time". Keep a watch for a breakout from the consolidation of $4.00 - $5.00 that has occurred for most of the year. We remain flat Crude but took new long positions in Heating Oil and Gasoline.
We consider this sector to be one of the most opportune going forward after experiencing a few months of pullback and the SPR release.
Metals: After being flat for many months, the Metals market kicked in again and provided fantastic results. The long term Gold trend moved sharply higher after pausing in May and June. We took a new long position in Palladium late in the month complimenting the position in Copper taken on June 30th. Last month we noted to "Keep an eye on this market to see if the long term trend reignites to the upside" - it would appear this has started to occur.
Grains: Grains provided a positive month after many months of choppy behaviour. While this in itself does not make for a trend, we see this as a positive sign in a sector that has produced great results over the last couple years. We continue to hold long positions in Corn and Soybeans (established positions since 2010). Both of these markets had a strong month. In July we added a long position in Wheat. This sector looks quite opportune.
Soft Commodities: Softs continued to be opportune after having a very good first half of the year. We are long OJ which had a very good month. We remained out of Lumber into month end despite its overall long term downtrend. We also covered our long position in Cotton for a very small gain. After the very profitable trend up in the second half of 2010, that market appears stuck sideways at the moment. Lastly, we are flat Coffee.
Currencies: Currencies had a good month in July. Most notably, we covered our short in the US Dollar index. The other positions are the same at month end. We remain long the Canadian and Aussie dollars as well as the Euro, the Pound and the Swiss Franc.
Interest Rates: Interest Rate futures were the most profitable sector in July providing almost half of the gain. Leaving the month we hold the same long positions. Of note: At the time of writing on August 2nd, we have re-sized and reduced risk in this sector, crystallizing significant long term gains made.
Equities: Global Equity markets were again lower in July and very choppy. It would appear there is some acceleration in this recent trend. At month end we continued to hold long positions in S&P, CAC40 (Paris) and the Russell but as of the writing we have sold all equity positions. The trend up would appear to be failing and the risk has increased significantly.