September was a choppy month as we experienced extended weakness and increased volatility across many asset classes. While our performance was negative on the month - the quarterly, year to date, and long term results continue to illustrate the non-correlated benefits of managed futures. Moreover, we continue to provide "event" protection as we experienced in 2008 and so many other times in history.
As measured by the S&P 500, the equity markets experienced one of the worst quarterly performances in history, down over 14%. While managed futures did not provide a perfect offset, the strategy did perform much better -1.52%. This brings up two benefits to adding Managed Futures to a portfolio:
First, Managed futures provides non-correlation to the broad markets, not necessarily negative correlation. If equity markets decline it does not mean that managed futures will be positive. Managed futures have little or no relationship with the returns of the equity markets, although sometimes they do move in the same direction.
Measuring correlations over short periods of time is less valuable as a statistic. Ideally this is measured over a period of years that encompasses many market environments and situations. Over the long term, our correlation to the S&P is -0.26. It is a non-correlated number that is slightly negative that highlights the benefits that have been achieved during periods of financial stress.
Second, another goal of managed futures is to provide a benefit during times of significant financial stress, what some describe as "Tail Risks". During this quarter, Auspice Diversified did just that. If the past is any indication, prolonged weakness could be harnessed very well by the Auspice strategy as the event unfolds and tail risk protection is needed.
- Q3 2008: -1.15%
- Q4 2008: +20.40%
- Q3 2011: -1.52%
- Q4 2011: ???
Click here for an excellent article on Tail Risk protection.
Take comfort in your investment at Auspice and our disciplined approach to the markets. Auspice practices an active risk management and capital allocation model. Thus, we adjust our exposure based on market risk. As with previous times in history, Auspice has actively adjusted risk to remain within our targeted level based on market volatility, liquidity and mark to market gains in the portfolio. All of these things ensure we will continue to crystallize opportunities while remaining appropriately involved in the markets during these opportune yet volatile times.
Highlights of the month: In September, the Auspice Diversified Program was profitable in 3 of the 7 sectors traded. The profitable sectors included Interest Rates, Equity Indices and Energies. Of the unprofitable sectors, many of them broke their uptrends or turned down substantially on the month.
Since full diversification (achieved in June 2007) the annualized return is now +11.2% with 13.5% volatility or 25-30% lower volatility than the Equity market. The global equity markets remain negative over this same period.
Interesting trades: During the month, we took profits in the other commodity currency, the Aussie dollar, which had been held since July 2010. We also took profits in US 2 year Notes, a long trade entered in May 2011. Lastly, we took profits in a long Orange Juice trade that was initiated in September 2010.
Key Points Regarding our Positions
Energies: The Energy markets were weak across the board in September. We remain short Crude Oil and Natural Gas, both which continued to trend lower. We remain on the sidelines in Heating Oil and Gasoline but are monitoring closely for further signs of deterioration.
Metals: We remain long Gold despite recent weakness as the long term trend remains intact. We entered a new short in Palladium as this market broke down from long term trading ranges helping to affirm the trend lower. We remain on the sideline in Copper at month end but have noted that it is no longer in an uptrend by our definition. The Gold market is the strongest of the sector as it has been for many months. Overall this sector was not profitable on the month.
Grains: After a couple strong months in the summer, Grains showed significant weakness in September. After taking profits in Soybeans in August, we took another long position. However, this position was exited quickly in September and we are now flat. The Corn position we have held since fall of 2010 was also exited right at month end. The same occurred in Wheat where we additionally got short by month end. This will be a sector to keep an eye on as it is in the transition period which is often hard to interpret on a short term basis.
Soft Commodities: Softs struggled during September. The long term OJ trade was exited profitably. We tried Cotton from the long side, but the trade was short lived and we covered during the month. Lumber proved particularly choppy and difficult to establish a trend in, albeit we remain short. Coffee was also very choppy and we exited the long position taken in August. This was another sector in transition.
Currencies: After global currencies took pause vis a vis the US Dollar in August, they fairly universally weakened in September. To that end, after remaining on the sidelines, we have now taken a long position in the US Dollar Index, the first since early 2010. We remain long the Japanese Yen, the strongest of the currencies, but have exited the other long positions held in August including Aussie Dollar, British Pound and the Euro. We remain on the sidelines in Swiss Franc and Canadian dollar, both which weakened considerably in September after we took long profits in August.
Interest Rates: Interest Rate futures were a profitable sector again in September. After reducing risk substantially last month, in September we cut positions in US 2 years and Eurodollars, mitigating short end rate risk as the upside (price) opportunity has been greatly diminished. We hold the same long positions from 5 years out to 30 year T Bonds.
Equities: Lastly, but not least, we were also profitable in the Equity sector on the month. Global equity markets were again significantly lower in September, dropping anywhere from 6 to 9% on the month. As at the end of August, we do not hold any long equity positions. Complimenting a short taken in the Japanese Nikkei in August, new short positions were taken in the Russell 2000, and Hong Kong's Hang Seng. We left the month flat the NASDAQ and the S&P markets but as of this writing have also gone short the S&P. Stay tuned.