Download the commentary here.
The Auspice Diversified Program was down 6.29% in June.
"Good Vol, Bad Vol, Interventions, CTAs fall"
At Auspice we are always very up front that like every investment strategy, there are less ideal periods for our particular strategy. While many commonly suggest that CTAs have trouble in periods without trend, we recognize that this is a challenge for most strategies and not a very good explanation. Like in June, periods of choppy volatility, central bank interventions, and sharp reversals are difficult times for most CTA strategies. In these times, we need to control the drawdown but not avoid taking calculated risk. We do not apologize for periods of sideways performance and modest pullbacks which are a reality and trade-off in producing non-correlated performance.
In June, many markets that had been falling reversed and moved higher in an abrupt fashion. The strategy is currently positioned defensively (tilted short), protecting from downside in many commodities and equities. Since equity markets moved lower starting in March/April and continued sharply lower in May, the diversification benefits of Managed Futures added value and a measure of reassurance in an otherwise volatile environment. While a negative individual month does not feel good, it needs to be taken in the context of the overall portfolio. If you consider the market still at risk and/or are looking for non-correlated diversification, this may be an entry point to consider.
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.
Most commodity markets rallied right near month end against short positions we hold in many sectors. The Auspice Diversified Program was profitable in only 1 of the 7 sectors traded with small gains from Metals during the month.
Interesting Trades: We exited a short trade in Wheat which rallied beyond previous highs set at the end of May. As mentioned in the May commentary, we exited the S&P mini futures on June 1 for a small gain since January.
The 5 year statistics (Jul 07 - Jun 12) are: +7.53% annualized return with 13.32% volatility. The worst drawdown for the period is 13.93% with an average Margin to Equity ratio of 6.4%. The global equity markets remain down over this same period with 25-35% more volatility. 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 from traditional investments due to stringent risk management and downside protection.
Additionally, for those interested in more ideas about investing in alternatives, please check out our blog.
Key Points Regarding our Positions
Energies: Energies moved higher along with many other commodities right at month end with the exception of Natural Gas that moved higher steadily throughout the month. While we continue to hold our short in Gas, we are not far from an exit point. Keep close watch. We remain short Crude which was entered at the end of May and added a short in Heating Oil. We are on the sidelines in Gasoline currently. As such, the sector remains tilted short.
For those with specific interest in this sector alone, please contact Auspice regarding the launch of our Energy focused strategy in collaboration with Pulse Capital Partners. The program went live on March 1st.
Metals: Metals were profitable on the back of a short in Palladium. Copper was largely sideways where we remain short. We remain flat gold at this time. This sector remains tilted short.
Grains: We covered the short trade in Wheat that had been in place since September 2011. Wheat had been the weaker of the grains but began moving higher beyond previous highs thus eroding further near term downside potential. As such, we exited with a gain before further deterioration in gains. Corn also moved sharply higher and we cut the short off quickly to prevent further loss. After exiting the Soybeans long position on weakness on June 1, we have re-entered the long side. Soybeans remain the stronger of the grains long term. At month end we are only holding a long position in Soybeans.
Soft Commodities: After great gains from the short side in May, most Softs experienced sharp reversals in June. We remain short OJ, Cotton, and Coffee and have also added Lumber which bucked the trend and moved lower on the month.
Currencies: Currencies continue to suffer from various interventions in global markets and a challenge to find a defined trend. We remain long the US Dollar Index and took a new long position in Aussie dollar right at month end. We remain short the Euro but covered the short in Swiss Franc to be flat. We are on the sidelines in the others including Yen, British Pound, and Canadian Dollar.
Interest Rates: Rates experienced a small loss on some position changes. While we remain long 30 year Bonds and US 10 year Notes (since early 2011), we have exited 5 and 2 year Notes. This sector has been one of the most profitable in recent years and it is affirming to see gains crystallized and risk reduced.
Equity Indices: After weakening sharply in the last couple months, the Equity market found reason to rally. The positions were tilted short at the end of May and as mentioned above, we exited the remaining long in S&P 500 and Russell 2000 futures right at the beginning of the month. While the move higher was against our short positions we remain short the CAC 40 in Paris. We covered shorts in the Asian Hang Seng and Nikkei markets. Additionally, we took a new long position in Russell at month end. Consider this sector currently neutral awaiting a direction.