Slow Markets – Don’t Expect it to Last

The performance is moving slowly these days with 20-40 basis points up or down per day for most of December so far. Meanwhile the exposure in the portfolio is building up more and more and while the risk level is not on extremely high levels, it is certainly above average. The trending theme out there is clear and consistent. We are short commodities, long rates and long the dollar. This could be seen as three separate themes but a quick glance at a covariance matrix will show you that this is one and the same theme.

We are still increasing the long rates bets and I can understand how that might be worrying at the current yield levels. My advice remains the same as always. Just do it. The stops are in place, the strategy knows how to keep losses to acceptable levels and the best way of failing to achieve predicted performance with a diversified futures trend following strategy is to skip some trades only to realize later that those happened to be the most profitable ones.

There are a few side bets in the portfolio and this is always something nice to have. By side bet I refer to any asset which either long term or short term shows a clear deviation from the dominant trends and exhibits no significant correlation to anything else in the portfolio. My favorite side bet is natural gas, which has been an amazing short for year after year due to the very sharp and lasting contango situation in that asset.

Compared to the competition we are still fairing quite well. The past few months we saw higher volatility than the competition which is always a negative unless it’s paid for with excess performance of course. We did better than most CTA funds, but given the volatility level in September and October, we should have done even better. Despite being far ahead of equity markets, I view 2011 as a bad year for CTAs in general but there are likely better times ahead.

Current portfolio holdings: