We harp on the so-called “risk on/off” trade fairly often, and we feel like it’s worth a reminder of why this is so important. The risk on/off trade, when certain groupings of markets rise together or fall together, can make life difficult for CTAs. Diversification is as vital a risk management practice for managed futures as it is for individual investors. You wouldn’t bet your entire life’s savings on one company’s stock, and CTAs don’t bet the farm on just one futures market, either (at least, most don’t).

But diversification requires markets that are… well, diverse (think multiple asset classes like grains, metals, currencies, etc).  That is, it isn’t enough to be invested in different markets– the markets must behave differently, too. And that’s the rub – when the risk on/off trade is in full swing (multiple markets moving in unison), you could have several different investments all behaving in much the same way. Different, but not diversified.

That’s why we’ve been cautiously optimistic about the trend in the corn market of late (and, to a lesser extent, grains as a whole). The markets have been far more concerned with USDA crop reports and weather forecasts than with the overall direction of the economy – getting back to what we like to see. Take this morning, for instance: corn was up over 1%, while the indices, energies, and metals were are all down more than -1% (corn was flat by the afternoon, but you get the idea). The rolling 30-day correlation between corn and the market average shows corn hovering around zero (non-correlated) during June, much like its behavior in March:

Disclaimer: past performance is not necessarily indicative of future results.

Managed futures is not quite benefitting (yet, hopefully), in part due to the choppiness of the market. Last month we took note when corn volatility surged to new 2012 highs. That surge, however, didn’t end – volatility has remained high, recently climbing to yet another 2012 high:

Disclaimer: past performance is not necessarily indicative of future results.

The volatility that has accompanied the weather and crop reports has made it difficult for CTAs to latch onto a trend… but at least the risk on/off trading from May seems to have been left behind. If it’s not one thing, it’s the other… but we can always hope for both market trends and uncorrelated market behavior.