As the 24-hour news cycle finishes squeezing the last drops of interest from the election, the next “big story” was determined long ago: the fiscal cliff. It’s hard to read anything on the financial web without at least seeing a passing mention, if not a series of articles dedicated to the looming budget debate it represents. And we’re still 46 days away from the end of the year.
But in our corner of the financial world, the fiscal cliff holds a somewhat different meaning. Managed futures, as we often say, doesn’t care whether the markets are moving up or down – it’s the character of the move that determines whether CTAs prosper or muddle through. So regardless of whether we see a “grand compromise,” a temporary stopgap, or go past the deadline with no deal struck, managed futures may reap the benefits… or suffer the consequences.
Specifically, for the trend followers that make up the bulk of the industry (and who have been struggling lately), the worse-case scenario would be any outcome that leads to a short trend followed by a quick reversal. For example, if the deadline passes with no deal and all sorts of risk on markets take a dive, only to be resuscitated by a 13th-hour compromise that sends those markets shooting back into the green, trend followers could get caught in the whipsaw for losses.
However, if a deal passes over the next few weeks and the market loves it (or hates it), leading to a prolonged rise (or fall) in risk on/risk off markets… trend followers could get just the market conditions they’ve been wishing for.
Like everyone else, there’s little we can do other than anxiously watch events unfold. But unlike the “buy, hold, and hope” crowd, we at least feel a little better knowing that it isn’t a binary event for managed futures – who don’t need a resolution and higher stock market prices to succeed. And speaking of those buy and hold types, if you haven’t prepared your portfolio for the possibility of losses due to the fiscal cliff, don’t come complaining. This crisis has been about as high speed as the Euro area problems were, meaning you’ve only had 6-12 months to prepare.