Thursday, November 5, 2015

Derivatives: "Managed Futures Funds Face Pain on U.S. Rate Rise"

The managed futures guys realized long ago that trend following is the only strategy that allows them to survive.
Unfortunately, by definition, trend following doesn't work so well at turning points.
From MoneyBeat:
Computer-driven hedge funds could be set for yet more pain if and when U.S. interest rates finally rise, according to the founder of one of Europe’s biggest such firms.

Ewan Kirk, whose Cambridge-based Cantab Capital Partners LLP runs $4 billion in assets, said that most funds in the $256 billion managed futures sector are betting on government bond prices rising. If rates rise, and bond prices fall, that “might be difficult” for such funds, he said.

“The beginning of that move will be a little bit painful,” he said in an interview with the Journal.
So-called managed futures funds, which try to latch onto trends and patterns in financial markets, have had a tough time in recent years. They made large gains last year, but lost money in each of the three preceding years, according to Hedge Fund Research, and are down 2.2% this year.

Man Group’s $4.4 billion AHL Diversified fund is down 3.3% this year to November 2 after losing 5.2% last month, according to data from the firm. Winton Capital, which runs more than $30 billion, has seen its Futures fund lose 0.8% this year to October 21, according to numbers reviewed by the Journal.

Cantab’s flagship Quantitative fund, which was one of the world’s best-performing hedge funds last year with a 39.3% gain, is down 10.5% this year to the end of October, said a person familiar with the matter.

Mr. Kirk, a former Goldman Sachs partner who has a net worth of £210 million ($321 million), according to this year’s Sunday Times Rich List for Britain, said funds such as his might have around one-quarter of their bets in interest rates. However, he added that other assets they bet on, such as stocks and currencies, could benefit from a rate hike....MORE
AQR--"Demystifying Managed Futures" (Returns and Anomalies)
UPDATED--Cliff Asness' AQR Capital: A Century of Evidence on Trend-Following Investing; Since 1903
"Two centuries of trend following"
CFTC Opens Probe Into Fees Charged by Managed Futures Funds
Following up on October's "Advisors, Turn that Worthless Client Equity into Valuable Commission Income".
The Last Word On Asness' Alpha, Buffet's Beta and The Failure of Commodity Quants (and how to turn hyperlinks into footnotes)
It's Anomalous: "Fact, Fiction and Momentum Investing"
Lessons From the Attempted Corner and Price Spike in The Guar Futures Trading Fiasco (HAL; SLB; BHI) 
A Look At Trend Following Hedge Funds And the Algos That Love Them
So why do commodity funds use trend-following?
Because trying to catch the turns is so dangerous to bonuses that the practice is best left to bloggers and other lunatics.
(sorry, still gloating over trading the recent S&P V-bottom almost perfectly out in public, on the blog, in real time, backwards, in heels: from warning in advance to calling the day of the bottom to cheerleading the upmove to new highs-waddya mean "Memento Mori", where's my laurel wreath, I'm going on parade)
Jesse's Café Américain
And many, many more. Use the 'search blog' box if interested.