One method that CTAs use to help manage risk is to select non-correlated markets to trade. 2011 made that difficult, as we outlined in our 2012 outlook. After seeing higher than usual market correlations and a major surge in risk on/risk off trading, CTAs were hoping that 2012 would give them a trading atmosphere better suited for market diversification. How’s that working out?
Let’s first take a look at the 2011 managed futures performance scapegoat – the risk on/risk off trading environment. We broke down the risk on/risk off trade earlier this year, when we looked for the average daily move of the “risk on” market grouping between 2000 and 2011 and defined a day as “risk on” when the average gain across all of those markets was over 1%. While 1% may seem somewhat small to be a full bore “risk on” day, that is the average across all those markets, and we found it to be best aligned with the reporting of risk on/risk off days in both the mainstream media and our own commentary. A “risk off” day was the inverse – a day where the risk on market grouping was down over 1%. Using these metrics, the risk on/risk off trade has continued its overall fade, with the vast majority of trading days YTD falling in the “normal category.”
With the books closed on March of 2012, we took a look at how the markets behaved in relationship to each other, with some unfortunate results. Across the board, correlation was generally higher than we’d like to see, with stocks, currencies, metals and energies displaying above average correlation levels. Softs and metals were the other strange relationship, with Coffee, for instance, at a correlation of .5 to Copper. Click here for a full-size image.
What does this all mean? Generally speaking, the data suggests that markets are moving in tandem more often than most would like, but without the dramatics of 2011. This lines up with some of the complaints we’ve heard from CTAs regarding choppy markets without substantive trends, but it doesn’t mean that everyone is suffering. Some CTAs have been able to benefit from recent moves. For instance, last week’s sell-off wound up bolstering the well-positioned Quantum Leap, which gained over 10% in the drops in Silver, Gold, Crude and others. Past performance is not necessarily indicative of future results, as is evidenced by some of the give-back Quantum Leap has experienced, but we’re hoping that similar gains are ahead of us for the asset class as a whole as 2012 progress.