WEDNESDAY, NOVEMBER 5, 2008
© 2008 Dow Jones & Company, Inc. All Rights Reserved.
Some Trend-Following Funds Are Winners in Rough Market
By Carolyn Cui and Ann Davis
Chasing the latest market fad isn’t all bad.
Some investment funds that jump on trends are outperforming traders who pride themselves on
outthinking the market. Increased volatility in markets from commodities to stocks is helping the trend
followers profit.*
A particular category of trend-following funds called managed futures funds have outperformed hedge
funds this year by making a killing from the dollar’s rally, the plummet of emerging markets and the
collapse of commodities.
With $234.1 billion in assets, these funds gained 8.9% year to date through October, while the average
hedge fund lost 18.9%, according to preliminary data from research firm Barclay Hedge. Barclay, which
isn’t related to Barclays PLC, doesn’t consider managed futures funds to be hedge funds, though other data
trackers do.†
*There is no guarantee
At managed futures funds, traders typically use customized trading algorithms to spot market trends
any strategy will be profitand place bets on futures and other derivatives. Instead of focusing on fundamental supply and demand,
able and avoid losses.
traders wait for their system to signal whether it is time to enter or exit from the market. When a trend
reverses, trading systems are supposed to be quick to spot the change and move in another direction.*
Most managed futures funds, which are often referred to as commodity-trading advisers, are less than
$1 billion in size, though some are larger. The sector’s heavyweight players include Man Group PLC’s $24.9
billion AHL program, Winton Capital Management’s $15.7 billion fund and Campbell & Co.’s FME Large
Portfolio with $4.7 billion in assets, according to Altegris Investments, a research firm.†
In recent years, when volatility was lower, many managed futures funds underperformed the average
hedge fund. They trailed the average hedge fund every year from 2003 to 2007 when stocks moved up
steadily, according to Barclay Hedge. Also, because these funds are trend followers, they tend to take a hit
initially when the trend reverses.
In August 2007, as the credit crunch emerged, managed futures funds plunged 4.6% when hedge funds
were just down 1.5%, according to Credit Suisse/Tremont Hedge Fund Index.†
But managed futures funds can fare particularly well in times of wild and extended price swings, in part
because computers can make calculated, emotionless reversals to seize on market changes that human
traders may be slower to accept.*
“We are not going to be the first to get in or the first to get out, but we are generally able to capture
80% of the trends,” says Paul Wigdor, managing director of Superfund USA Inc., which runs two managed
futures funds in the U.S. together holding about $100 million. They are up 39% and 26.3% this year through
October.†
All of the six managed-futures funds run by John W. Henry & Co., founded by Boston Red Sox baseball† Past performance is not
team owner John W. Henry, were up this year, with the largest one—the $161 million GlobalAnalytics—up
necessarily indicative of
72.4% through October. The success is because of “the dramatic moves both to the upside and the downside
future results.
we have seen,” across the board, says Ken Webster, the company’s president.†
This fall, wild swings are the rule, rather than the exception. Volatility in commodity markets is
hovering at or close to all-time highs. Crude prices are at their most volatile this decade, fluctuating in a
range that put them as high as $147 in July and in the low $60s last week.
Volatility levels of gold, copper, nickel, lead, corn and soybeans are now at or have recently hit higher
levels than at nearly any other point this decade, according to Morgan Stanley data. The level of volatility
in the S&P GSCI commodity index, a widely watched basket of commodity prices, reached 50.4% last
month through Oct. 30, compared with 23.1% over the past 10 years, according to Barclays Capital, a unit of
Barclays PLC.
Stocks—and thus the values of stock indexes that managed futures funds are likely to trade—have been
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even more volatile. According to Barclays, the level of volatility in the Standard &PLEASE
Poor’s 500-stock
index
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objectives, generate profits or avoid losses.
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Important Disclosures
!
82.4% in the same period, compared with a 10-year average of 19.6%. “These markets have been extraordinarily difficult to trade,” says Kevin Norrish, an analyst at Barclays Capital. As commodities got crushed
in October, trend-following programs largely worked, because “it just paid to be short.”†
Barclays attributes the volatility in part to a reduction of risk by many types of traders. As more players
exit from the market, fewer buyers and sellers are left and the market has less liquidity, leading to bigger
price swings. Some say managed futures funds can sometimes exacerbate trends by piling onto those
moves.
Clarke Capital Management Inc., which runs nine managed futures funds, has been among the best
performers this year. Its largest, $72.2 million Millennium program gained 82.2% through October, says
Michael Clarke, president of the Hinsdale, Ill., company. Millennium trades a mixture of 48 futures
including grains, metals, currencies and interest rates, and it has three time frames with various stop
limits, or maximum losses that will trigger the exit from a position.†
One successful bet it made this summer was in energy: The fund started shorting crude oil when it
hovered around $130 and $140 a barrel, then stayed with the trade down to $80 before getting out. “We
collected the bulk of the move,” Mr. Clarke said. The fund has stayed out of energy for weeks, as its system
hasn’t detected any entering signals.*
At Virgin Islands-based Drury Capital Inc., which runs seven managed futures funds, the largest with
$154.2 million in assets, traders started selling short S&P 500 index futures in November 2007. The index is
down about 36% since then; the largest Drury fund was up 56.9% through October.†
Mr. Henry has been profiting from the recent moves in energy and the rally of the dollar.
*There is no guarantee
any strategy will be profitable and avoid losses.
† Past performance is not
necessarily indicative of
future results.
Trend Traders Outperform† *
Annual returns
20%
10
0
–10
Barclay CTA index
Barclay Hedge Fund index
–20
2001 ’02 ’03 ’04 ’05 ’06 ’07 ’08*
Source: Barclay Hedge
*Year to date,
preliminary
PLEASE SEE LAST PAGE FOR IMPORTANT DISCLOSURES
There is no guarantee that any investment product will achieve its
objectives, generate profits or avoid losses.
Important Disclosures
Past performance is not necessarily indicative of future results. Investment returns and principal value of an investment will fluctuate, therefore, you may
have a gain or a loss when you redeem your interest.
The risk of loss in trading commodities can be substantial.
An investor cannot invest directly in an index. Moreover, indices do not reflect commissions or fees that may be charged to an investment product
based on the index, which may materially affect the performance data presented.
Important Disclosures
APM Funds, an affiliate of Altegris Investments, acts as a business relationship with both Winton Capital Management and Clarke Capital Management.
APM is registered with the Commodity Futures Trading Commission (CFTC) as a commodity pool operator; is a member of the National Futures Association (NFA); and Past
is a California-registered
adviser. Altegris,
a FINRA and
NFA member,
offers
various alternative
investments,
performance investment
is not necessarily
indicative
of future
results.
Investment
returns
and including
hedge funds, futures funds and managed futures and commodities accounts, that may operate in commodities markets and foreign markets, among
principal
value
of
an
investment
will
fluctuate,
therefore,
you
may
have
a
gain
or
a
others. Altegris and/or its officers/partners may have a financial interest in such alternative investments.”
loss when you redeem your interest.
The risk of loss in trading commodities can be substantial.
An investor cannot invest directly in an index. Moreover, indices do not reflect
commissions or fees that may be charged to an investment product based on the
index, which may materially affect the performance data presented.
APM Funds, an affiliate of Altegris Investments, acts as a business relationship with
both Winton Capital Management and Clarke Capital Management. APM is
registered with the Commodity Futures Trading Commission (CFTC) as a commodity
pool operator; is a member of the National Futures Association (NFA); and is a