The Year of Unprecedented Intervention

It's no surprise that commodity trading advisors (CTAs) had a tough year in 2009 after their impressive performance in 2008. But what exactly contributed to the differences between top traders? While trend followers struggled, some managed futures programs excelled.

A closer look at the Barclay Discretionary Traders Index reveals it was up 2.16% in 2009, while its Systematic Traders Index dropped 3.3%. John Hummel's AIS Futures Management program, described as trend following but discretionary and long-term, returned an impressive 64.31% for his 2X-4X program and 97.26% for his 3X-6X program.

The Importance of Discretion

Several managers cited the Federal Reserve's quantitative easing decision as a major market driver in 2009. Stanley Haar, whose discretionary agriculture program dropped a few percentage points, noted that interventions tilted the dollar/ag balance against him.

Haar trades off fundamentals and was hurt by government interventions. His program's performance highlights the challenges faced by CTAs during this period of unprecedented intervention.

Market Correlation: A Double-Edged Sword

The negative correlation of the dollar to almost everything caused some managers to be cautious, but it also provided opportunities for others. Discretionary trader Michael Frischmeyer noticed traditionally non-correlated positions showing negative correlation and treated them as a hedge.

Frischmeyer's program returned a notable performance in 2009 by loosening risk management slightly and allowing positions to move adversely due to recognizing counterbalanced positions. His ability to adapt to market conditions prevented him from being chopped up as much as if he carried normal stops.

Sector Correlation: A Silver Lining

Concerns over sector correlation may have prevented even worse returns in 2009. Many managers reduced position sizing as positive returns mounted and it became apparent many markets had become highly correlated.

This phenomenon is interesting, as most CTAs underperformed in 2009. However, losses were not as severe as those seen in mutual funds and hedge funds in 2008, which may be due to managers being more cautious. Jay Feuerstein, principal of 2100 Xenon, attributed the tough conditions to choppy markets and the Fed's quantitative easing.

The Role of Volatility

Feuerstein's managed futures program dropped 7.56% in 2009. He produced a daily bund chart illustrating extremely choppy conditions, which hurt mean reverting trades. Grains and energies also experienced significant volatility during this period.

Perhaps trends in metals, currencies, and equity indexes could have offset the choppy markets if it weren't for the sharp reversals at the beginning and end of the year.

Actionable Insights

The analysis of top traders in 2009 highlights the importance of discretion and adaptability in managing futures programs. It also underscores the challenges faced by CTAs during periods of unprecedented intervention.

Investors should consider diversifying their portfolios to mitigate risks associated with sector correlation. By understanding the market dynamics and adapting their strategies accordingly, investors can potentially capitalize on opportunities that arise from these complexities.