Tough Month for CTAs, where few will post positive returns
May could well turn out to be a very interesting month for people analyzing CTAs, in their quest to find a place to invest their money.
WHY do I say that?
Well because I have a feeling that managers with too much dependence on a few sectors, probably found May to be a tough month to get through. Now keep in mind that I'm writing this during the morning of the 1st of June, before any managers have released their performance data, so of course there is the chance that I will be proven wrong!
"But if my suspicion is right, then managers with a lot of reliance on Currencies, Metals and Bonds may have had a difficult time"
What is interesting about these 3 sectors is, that they are generally very liquid and thus attract a lot of attention (and exposure) from the larger managers, so I suspect that we could see somewhat similar performance from this segment of the CTA industry.
Incidentally, I noticed in an article yesterday, that currently 79% of the $142bn managed futures assets in eVestment's database sit with $1bn+ managers.
OK...now back to the Trend Barometer which on a closing basis ended the month of May well below the Break-Even point of 45.
Firstly, let’s look at where the trend Barometer finished the month;
Right from the get-go of the month of May, the trend barometer headed south. And with an average reading of app. 32 during the month, May really was one of those months where trends were hard to find and risk management was critical in order to do well.
The next chart below shows a snapshot of a 44-market portfolio with markets listed in “groups” of market sectors;
The strongest trends at month-end, was recorded in the Grain Sector (Corn, SoyBean & SoyBean Meal) as well as Sugar, which recorded the strongest Up-Trend. Medium Up-Trends were found in the Energy sector as well as selected Stock Markets like SPI, Swiss Market Index and Nasdaq. Only the Mexican Peso ended in a Down-Trend.
In the chart below, I have grouped the markets into 10 sectors. 2 out of 10 Sectors finished the month in a trending state (Energies and Stocks). Another piece of evidence that only few trend followers is expected to be posting black numbers in May.
"It has been a while since we last saw more than 3 sectors showing signs of trending behavior at the end of a month"
The last chart shows the evolution in the Trend Barometer since January 2015.
The month of May spent all but one day below the "break-even" level of 45% in the Trend Barometer, extending the difficult environment we have witnessed during the last few months, BUT...
"as we head in to the month of June, with the UK election and possibly more action from Central Banks, I suspect that the drought in trends may come to an end, combined with a renewed increase in volatility.
It certainly looks like we have an interesting period ahead of us"
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS
I hope you found the information useful as part of your own evaluation of the trend following part of your investment portfolio. I will continue to do my best to keep you up-to-date with regards to the environment for diversified trend following strategies and would love to discuss any of this information with you. Just reach out to me.