Managed futures funds experiencing hard times on global scale – Superfund also affected by adverse market conditions
Following a period of strong returns from November 2005 to April 2006, many technical trading systems have been affected worldwide by drawdowns (temporary drops in value) caused by unanticipated market developments, greatly exacerbated in recent weeks by the outbreak of war in the Middle East.
Favorable market trends provided a profitable 6 months trading environment until April 2006 for many managed futures funds, including Superfund products. World markets adhered to their usual cycles, offering ideal conditions for technical traders. Since May however, volatility and uncertainty has significantly increased in numerous world markets, with consequential effects on the Superfund trading systems.
International equity markets dropped in early to mid May, forcing Superfund products to close out various long positions and give up profits. The Superfund trading systems reacted by entering short positions, anticipating a further downward market trend. In fact, the equity markets recovered in the second half of June, only to suffer another drop in the middle of July, so that July – like the month of June – ended with no clear market trend.
Interest rates were affected similarly to the equity markets, but in the reverse direction.
By taking positions in the gold market, Superfund products were able to capitalize on sustained trends through the middle of May. Starting in June, however, these positions were closed out through stop-loss limits, as the direction in gold markets turned. Between its May high and June low, gold lost 23% in value. In July, the systems established new positions in the gold market that are slightly under water or breaking even.
Most recently, the outbreak of war in Lebanon and the Gaza Strip has provided general adverse conditions for technical traders. The energy markets continue to rise briskly. After having reached a new all-time record of 80 U.S. dollars per barrel, crude oil has now receded to 75 dollars, with a sustained trend remaining elusive. Natural gas rose 25.4% due to the warm weather and start of the hurricane season, although it has recently lost some of this ground. The energy markets remain volatile, with clear trends still lacking.
Grains also experienced a rally, with an early gain of 9 percent due to the increasing heat and harvest forecasts, but strong rainfall in the U.S. has now lead to a reversal in the market and a collapse in prices.
How surprising are drawdowns like these? “They are nothing out of the ordinary and can even be predicted in statistical terms. We just have to understand why they keep recurring,” explains Christian Halper, who developed the Superfund technical trading systems, as he analyzes the present environment. “Markets have been behaving contrary to expectations, due to the recent unforeseen geo-political developments,” reflects Superfund founder Christian Baha on the current situation.
Superfund managed futures funds are long-term investments designed to provide strong medium- to long-term returns. Drawdowns are an inevitable component of investment performance and may arise from a number of different circumstances:
1. Winners and losers. A trading system may be drawn into taking positions in misleading trends which are in fact caused by short-term fluctuations and thus quickly change direction. As technically sophisticated and intelligent as the system is, it may be unable to initially distinguish between short-term fluctuations and significant, lucrative market trends. Even in so-called “sideways periods,” when no clear trends in the market can be recognized, false signals can frequently occur. Since there are hardly any market trends to exploit in sideways periods, there is little opportunity to generate profits. The problem arises when sideways trading dominates various markets at the same time. Then the ratio of losers to winners rises, which can result in a significant drawdown. This has been the case in point over the past few months.
2. The Superfund system is selective. In contrast to other trading systems, the Superfund trading systems only enter into new positions when they see a high probability of profit. The disadvantage inherent in this system is that it may miss out on some favorable trends.
3. High short-term volatility. The short-term volatility in the commodities markets has been very high this year. Generally, we have seen a constant up and down shift in prices rather than a steady trend. As a result of these extreme price fluctuations, Superfund products have often been stopped out of their positions before being able to realize profits