The folks at Managed Futures consultant Attain Capital Management maintain an interesting blog for those looking to stay abreast of developments in that asset class. Attain recently commented on and published excerpts of an investors update from RG Niederhoffer Capital Management (founded by the brother of famous trader Victor Niederhoffer). In this update Mr. Roy Niederhoffer warns about the effects of a normal yield curve on a trend following strategy in T-Note (Bond) futures attempting to profit from a rising rate environment.
As a whole, futures managers who invest in the futures markets have derived part of their performance from the long uptrend in bonds (downtrend in interest rates), as this trend reverses, investors in managed futures should realize that shorting bonds on a long timeframe isn't the same as going long . That's because of the pricing mechanism of interest rate (IR) futures. The forward price of a bond is equal to the spot price + cost of carry. In a normal yield curve (short-term rates lower than long-term rates) investors make money holding the bond (they borrow short-term, invest in the bond earning the differential IR), the cost of carry is thus negative. This means that the forward price (future price) of a bond is lower than the spot price (today), futures trade at a discount to cash. For the futures trader implementing a trend following strategy on the short side, it means suffering from the same type of negative roll yield investors in commodities can experience (in a contango or normal market) : at each contract expiration, the trader must sell short new contracts which trade at lower prices .
As a whole, futures managers who invest in the futures markets have derived part of their performance from the long uptrend in bonds (downtrend in interest rates), as this trend reverses, investors in managed futures should realize that shorting bonds on a long timeframe isn't the same as going long . That's because of the pricing mechanism of interest rate (IR) futures. The forward price of a bond is equal to the spot price + cost of carry. In a normal yield curve (short-term rates lower than long-term rates) investors make money holding the bond (they borrow short-term, invest in the bond earning the differential IR), the cost of carry is thus negative. This means that the forward price (future price) of a bond is lower than the spot price (today), futures trade at a discount to cash. For the futures trader implementing a trend following strategy on the short side, it means suffering from the same type of negative roll yield investors in commodities can experience (in a contango or normal market) : at each contract expiration, the trader must sell short new contracts which trade at lower prices .
RG Niederhoffer's research concludes that if rates were to rise in the next 23 years mirroring the fall of the past, the positive return of 4.7% annually of the past would turn to -1% per year for trend followers.
http://www.attaincapital.com/alternative-investment-education/managed-futures-newsletter/investment-research-analysis/521
Attain also reviews the recent performance of Commodity Trading Advisors. In a recent post, I argued that 2014, at least Q1 ( and Q2) could very well be another tough year for hedge funds, particularly trading strategies (managed futures). The performance of CTA's for January recently came out and confirmed what we said . Trend followers got killed as we expected. Attain has the lowdown : Managed Futures down -1% in Jan. (Where's the Crisis Performance ?)
And while you are visiting Attain's blog, I highly recommend their rebuttal of a misinformed and deceptive article by Bloomberg on Managed Futures :
A couple of months ago, Bloomberg.com published a very scathing article on the managed futures industry, putting every managed futures product in the same basket and implying these products were tantamount to a scam. This was quite surprising from Bloomberg whose content is usually top-notch, the article was obviously giving a very inaccurate representation of what managed futures are, reflecting the writer's bias against the asset class and a serious lack of understanding of managed futures. Unfortunately, this type of bias is not uncommon in the financial press, hedge funds remain misunderstood by many, including people who should know better. I had wanted to write a critique of the article but Attain 's blog took care of it and I couldn't have done it better. The chief mistake of Bloomberg's writer was to look at the banks' offerings : the products distributed by banks come with extra layers of fees, and it's no surprise that, as Bloomberg reports, 89% of the gains made by investors are lost to fees. Managed futures can however be accessed directly, the traditional way (managed accounts or pools) , and when doing so, fees are the same as with hedge funds, i.e 2/20 structure (with sometimes trading commissions on top for the trades made by the trader). This fee structure is nowhere near the outrageous (and hidden) fees some bank offerings and "small investor funds " may charge. .
