October brought continued volatility across many global asset classes. In particular, the significant equity market weakness of Q3 was partially recouped; while the S&P fell over 15% in Q3, approximately 10% was regained in October. While this may provide some comfort in the short term (band-aid) it continues to raise concerns over the enormous volatility and risk in that asset class. As such, we do not take much comfort in the rebound in any regard and this validates investor need for diversification and non-correlation.
As with the comments last month regarding correlation and periods of appropriate measure, one sometimes feel like asset classes are highly correlated when we are hoping (and wishing) they are not. This is perhaps how it has felt the last few months with our strategy and managed futures more broadly vis-a-vis the equity markets. However, if one considers the correlation over a longer period, we see that the correlation is indeed low. It is also a bit negative, which is important as well. (For more talks about non-correlation and ways to get it, visit the www.amfmblog.com).
The key is the correlation is low but tilts to negative when the investor needs it most - times of financial crisis (tail risk protection). So - while the last 4 months from July (on an individual basis) may have felt like managed futures were perfectly positively or negatively correlated, the reality is both our strategy and equity are down but importantly the correlation is actually -0.42: a moderate negative. This is indicative of the portfolio benefit and it is patience that will allow the long term effects to result in our desired goal: absolute returns. Patience is required.
Highlights of the month: In October, the Auspice Diversified Program was not profitable in any of the 7 sectors traded. The last time this occurred was in July 2008. Opportunities often arise (and did in 2008) out of these directionless markets which are significant for the strategy. Out of the chop comes the trend.
Since full diversification (achieved in June 2007) the annualized return is now +9.9% with 13.6% volatility, 25-30% lower volatility than the Equity market. The global equity markets remain down over this same period.
Despite the negative performance, there were a couple of bright spots: We took profits in US 5 year Notes at 5 times initial risk. Also, on the last day of the month we exited a long position in Japanese Yen.
Key Points Regarding our Positions
Energies: Energies struggled as it was choppy and lacking trend (with the exception of natural gas continuing to trend lower). We covered our Crude short during the month and are now flat along with Gasoline. We took a new long position in Heating Oil at month end while remaining short Natural Gas.
Metals: Gold continued higher after the quick correction at the end of September - none of this changes the long term uptrend. We took a new short in Copper but exited on a stop by month end. Lastly, we are still short Palladium. Keep an eye on this one as it can be an aggressively trending market.
Grains: We remain on the sidelines in both Corn and Soybeans as they currently experience continued consolidation within tight ranges. We remain short Wheat through its own sideways action during the month.
Soft Commodities: Like the other sectors, Softs didn't have a positive month. We remain short Lumber and added a new long position in OJ. We remain flat Cotton and Coffee.
Currencies: Currencies remained choppy which in one sense isn't surprising given the global financial stresses and critically, policy interventions. The long Japanese Yen trade was exited profitably on the month. We also exited the recently added US Dollar index length that was noted to be the first shot at USD from the long side in a long time. As such, we also added long positions in Swiss Franc, Aussie Dollar, Canadian Dollar, and the Euro.
Interest Rates: We continued to drop short-end rate risk started in August by exiting US 5 year Notes. Great trade. We remain long the 10 years and 30 years.
Equity Indices: It should be no surprise the Equity Indices were the biggest challenge on the month. The aggressive rebound was counter to the trends lower that have been developing the last 4 months in most markets. Timing of the short entry late last month in S&P proved poor and we exited quite quickly. We also covered shorts in CAC 40 (Paris), Hang Seng, and Russell 2000. This leaves us with a single remaining short in the Nikkei. Obviously, Equities are a key sector to monitor as the markets look for clarity and we look for....trend.