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Managed Futures Benefitting From Shifting Central Bank Policies

The recent volatility witnessed in the equity markets, combined with the macroeconomic backdrop of divergent central bank policies, is highlighting the benefits of managed futures, according to firms in the segment.

Campbell & Company has released a paper suggesting that the Q3 of 2014 shows why investors might benefit from investing in managed futures funds.

In the paper Campbell & Co claims that the fact that managed futures have the potential to profit from market declines, can capture opportunities in non-traditional asset classes and can be globally diversified is an advantage in current market conditions.

With interest rate hikes on the horizon in the US, and potentially the UK, while other central banks such as those in Japan and Europe continue stimulus programmes, the divergence in policies is causing movements in alternative asset classes, which is making them more attractive to investors.

Speaking to Profit & Loss, Mike Harris, president of Campbell & Co, emphasised that FX is one example of an alternative asset class that is outperforming traditional ones right now.

“FX had unfortunately gone to sleep as an asset class for some time. Volatility was low and markets weren’t trending. The last couple of years have seen a race to zero for central banks in interest rates which created an environment where we didn’t see a lot of divergence regarding monetary policy.

“But we’re starting to see central banks going in different directions, which has created some healthy moves in the FX market, which means that we’re starting to see the carry trade come back into fashion,” he says.

This is evidenced by the fact that FX was the best performing asset in Campbell & Co’s portfolio in Q3 with 7.6% returns. Commodities returned 4.5%, while bonds and equities returned 2.4% and 0.3% respectively.

Similarly, Glenn Graham, president and chief investment officer at Golden Point Capital Management, says that his managed futures fund had the most success in October in FX.

“Throughout October we continued to see a substantial increase in the value of the US dollar versus a basket of foreign currencies. We were able to profit on this substantial move, as our models had previously dictated short exposure to both the euro and the Swiss franc; both of which declined substantially throughout October,” he says.

Graham adds that the highlight of the month for Golden Point Capital Management occurred in the last day of trading when the Bank of Japan announced its intention to add further quantitative easing, causing the yen to collapse versus the US dollar while the Nikkei rallied.

This once again shows the impact that divergent central bank policies are having on the FX market and the managed futures funds with exposure to them.

According to Harris, one potential upside to investing in systematic trading firms over discretionary is that systematic firms can sometimes be quicker to react to these sudden changes in the market.

“One of the advantages of managed futures firms like ours is that, because many of us maintained our exposure in FX and other alternative markets in our portfolio, we were able to capture some of these big break out moves,” he says.

The uncertainty around the future of the equity and fixed income markets caused by changes in central bank policy was demonstrated in October when there was a sudden decline in US equities and some of the biggest single day bond moves since 2008.

This could, according to Harris, further encourage investors to consider strategies with exposure to non-traditional asset classes.

“It hasn’t been the best environment for managed futures over the last few years and, although we’ve been one of the better performing managers, investors haven’t really seen the need to focus on alternative investments because traditional assets have done so well.

“But with central bank policy divergence, volatility around traditional asset classes is picking up. In the middle of October US stocks were down around 7-8% but many managed futures managers were positive – I know that we were.

“On that occasion stocks roared back with a 9% gain in the second half of the month, but I think that some investors are starting to realise that it might be better to diversify their portfolio because the next time a big correction like that comes the equity market might not bounce back in the same way,” he explains.

Profit & Loss reported last week that the Newedge CTA Index shows strong performance for the past three months (Squawkbox, 17 November), while Campbell & Co reports 12.8% returns for that period. Golden Point Capital Management profited 2.54% in October and is up 64.48% in 2014 while the S&P 500 is up 9.18% year-to-date.

Profit & Loss

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