by Rodrigo Gordillo, President, ReSolve Asset Management
Introduction
I’ve been hearing many macro managers and managed futures industry insiders (including myself!) exclaiming that the “decade of macro is finally here!”. But even if this is true, how excited should we be?
In this blog post, we will explore the historical trends and performance of managed futures strategies using the Tech Crisis of 2000 to March 13, 2003 as a case study, and why it may be relevant for the current macro environment. We will also delve deeper into the emotional challenges that investors face during these periods.
Historical Relevance – Why the ‘Tech Crisis’?
Many have recently drawn analogies with the 1970s to try and predict what might be in store for today’s investors, mostly because that’s how long it’s been since the US and much of the West have experienced any meaningful inflation for multiple years.
But there may also be some important lessons to be gleaned from the period of the Tech Crisis between 2000 and 2003. As opposed to the acute dynamics of the 2008 credit crisis that resolved itself in only a few quarters, the “Tech Crisis” began with a major sell-off in technology companies in March 2000, but continued with a series of independent shocks like the 9/11 terrorist attacks in 2001, major accounting scandals (think Enron and WorldCom) in 2002, the second Iraq War in March 2003, ending with the earnings recession that followed shortly thereafter. It was characterized by aggressive price swings, including acute bear market rallies and fakeouts that made this an especially difficult trading period, and lasted approximately three years, until markets finally found their footing in Q1 2003.
SocGen Trend Index Case Study – Managed Futures and Macro Managers’ Excitement
For managed futures and macro managers who can go long and short equities, bonds, commodities, currencies, and more, a bear market can present unique opportunities to produce strong, non-correlated returns that traditional long only portfolios typically cannot. Analysing the SocGen Trend Index during that four-year period reveals that managed futures trend indeed thrived during this time (Figure 1).
Figure 1. Calendar Returns of Managed Futures Trend vs Global Equities (2000-01-03 to 2003-03-13)
Source: Data from Societe Generale and CSI. Analysis by ReSolve Asset Management SEZC (Cayman). Global equities is represented by MSCI All Country World Index. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
Three of the four years saw double-digit positive returns, and one year had zero returns. Throughout the entire period, the trend index annualized at +14.8% vs. -18.7% annualized for global equities (past performance does not guarantee future results).
Easy Decision or a Deeper Dive?
So, does this indicate that investors can simply allocate to strategies like these and sail through another bear market? Unfortunately, the bar graph in Figure 1 does not tell the full story. In speaking to veterans in the managed futures space it reveals that these four years were in fact some of the most emotionally draining years of their careers. To understand why, we must examine the journey required to achieve these impressive end-to-end returns.
A Closer Look at Equity Lines
Figure 2 shows what the equity line looked like for the trend index during that period. At first glance, the trend index appears almost a mirror image to global equities, with a terminal return over the period of 58.1% when global stocks were down -49.6%, in other words 107% of outperformance! (Past performance does not guarantee future results).
But if we look a little closer – what would the day-to-day and week-to-week experience of the blue line have felt like as an investor?
Figure 2. Equity Lines of Managed Futures Trend vs Global Equities (2000-01-03 to 2003-03-13)
Source: Data from Societe Generale and CSI. Analysis by ReSolve Asset Management SEZC (Cayman). Global equities is represented by MSCI All Country World Index. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
Understanding the Journey of Drawdowns, Zigzags and New Peaks
In Figure 3, we break down the equity line into two types of regimes: The red shaded areas represent drawdown/zigzag periods, while the green areas indicate periods when the strategy hit new higher peaks. What becomes abundantly clear is that during a schizophrenic equity bear market, the trend index spends most of its time in ‘purgatory’, punctuated by brief ‘moments of brilliance’ that create new highs. Surprising to investors, but well known amongst trend managers, the trend index spends less than 15% of the time establishing fresh new highs!
Figure 3. Regimes of Managed Futures Trend (2000-01-03 to 2003-03-13)
Source: Data from Societe Generale and CSI. Analysis by ReSolve Asset Management SEZC (Cayman). Global equities is represented by MSCI All Country World Index. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
The Emotional Rollercoaster
One can almost hear the conversations between managers and allocators during those red periods, especially those who invested heavily during the parabolic runup from October 2000 to January 2001 (probably most of them), only to find themselves criticizing their managers for underperformance over the following 12 months, before once again reaching a new high, but only with little time to celebrate before they repeated the cycle over again.
Today’s parallels
There’s been no shortage of turmoil in the last few years: a global pandemic, unprecedented government interventions, multi-decade high inflation, global wars and such a rapid rate hiking cycle that it may have led to a full-blown bank run! Figure 4 shows how the Trend Index has held up against Global Equities since the equity bear market began in January 2022:
Figure 4. The Current Bear Market – 2022-01-03 to 2023-03-16
Source: Data from Societe Generale and CSI. Analysis by ReSolve Asset Management SEZC (Cayman). Global equities is represented by MSCI All Country World Index. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.
Fifteen months in and the SG Trend Index has once again delivered valuable offsetting returns that almost mirror that of global equities, +13.7% vs -14.5% (past performance does not guarantee future results), in spite of the fact that it has not hit a new meaningful high since June 15th, 2022 and that the index constituents were caught aggressively offside during the Silicon Valley Bank collapse. Not easy!
The Moral of The Story
The moral of the story is that prolonged, multi-faceted bear markets, with all the trials and tribulations, make it an incredibly challenging period for every investor regardless of whether you are making positive returns or not.
So, whether you are a long-only equity investor, balanced portfolio investor suffering through a drawdown or a macro/managed futures investor making positive returns or all of the above, this period will require a deep understanding of why you are invested in what you’re invested in.
Specific to managed futures, investors will need to internalize why this is such a unique and useful tool over the full bear market cycle.
As a recap, Managed Futures Trend strategies have historically tended to offer the following benefits:
- they show non-correlation to stocks and bonds over time
- they provide positive and offsetting returns during full bear market cycles
- they achieve strong real returns during inflationary regimes
Yet, if you base your decision to stick with managed futures merely on 3-9 months of realized returns, then your chances of extracting this diversifier’s unique value are slim. What is essential is to internalize your understanding of its character, write down your long-term plan, include it as a strategic (possibly Return StackedTM ) long-term allocation in your portfolio and find some fortitude to rebalance back to the plan as needed.
Conclusion
While managed futures and global macro strategies have shown historical success during bear markets, it is important that we recognize the behavioral and emotional challenges that can come with such periods. By having a clear understanding of their investment choices and developing a long-term plan, investors stand a better chance of navigating turbulent market environments.
Investors should always keep in mind that no investment strategy comes without risk, and that past performance of managed futures, global macro or any other strategy does not guarantee future success. What these strategies can offer is an investment approach that is structurally different to that of traditional stock and bond portfolios, with unique characteristics that stand a better chance of providing positive returns in inflationary periods and equity downturns.
In the end, successful investing in a tumultuous market requires a combination of knowledge, patience and discipline. By carefully considering your investment strategy and staying the course, you can improve your chances of weathering the storm and ultimately reaping the rewards you originally sought. Remember, the goal is not to merely survive the bear market but to thrive over multiple decades.
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DISCLAIMERS
This commentary has been provided solely for informational purposes and does not constitute a current or past recommendation or an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such. This commentary should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
This document does not reflect the actual performance results of any investment strategy or index currently run by ReSolve Asset Management SEZC (Cayman).
Confidential and proprietary information. The contents hereof may not be reproduced or disseminated without the express written permission of ReSolve Asset Management SEZC (Cayman). The information set forth in this document has been obtained or derived from sources believed by ReSolve Asset Management SEZC (Cayman) (“The Authors”) to be reliable. However, The Authors do not make any representation or warranty, express or implied, as to the information’s accuracy or completeness, nor do The Authors recommend that the information serve as the basis of any investment decision.
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE PERFORMANCE.
Certain information contained in this document constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of an investment managed using any of the investment strategies or styles described in this document may differ materially from those reflected in such forward-looking statements. The information in this document is made available on an “as is,” without representation or warranty basis.
There can be no assurance that any investment strategy or style will achieve any level of performance, and investment results may vary substantially from year to year or even from month to month. An investor could lose all or substantially all of his or her investment. Both the use of a single adviser and the focus on a single investment strategy could result in the lack of diversification and consequently, higher risk. All investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. There is a risk of substantial loss associated with trading commodities, futures, options, derivatives and other financial instruments. Before trading, investors should carefully consider their financial position and risk tolerance to determine if the proposed trading style is appropriate. Investors should realize that when trading futures, commodities, options, derivatives and other financial instruments one could lose the full balance of their account. It is also possible to lose more than the initial deposit when trading derivatives or using leverage. All funds committed to such a trading strategy should be purely risk capital.
Equity line results show the growth of $100 assuming the purchase or sales of securities were executed at their daily closing price and profits are reinvested. Any strategy carries with it a level of risk that is unavoidable. No investment process can guarantee or achieve consistent profitability all the time and will necessarily encounter periods of extended losses and drawdowns.
The information herein is not intended to provide, and should not be relied upon for accounting, legal or tax advice or investment recommendations. Any investment strategy and themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. You should consult your investment adviser, tax, legal, accounting or other advisors about the matters discussed herein. These materials represent an assessment of the market environment at specific points in time and are intended neither to be a guarantee of future events nor as a primary basis for investment decisions. Investors should understand that while performance results may show a general rising trend at times, there is no assurance that any such trends will continue. If such trends are broken, then investors may experience real losses. The information included in this presentation reflects the different assumptions, views and analytical methods of The Authors as of the date of this document and The Authors should not be expected to advise you of any changes in the views expressed herein.
Leverage Risk from use of Derivative Instruments. Investments in derivative instruments such as futures, options and swap agreements, have the economic effect of creating financial leverage and may give rise to losses that exceed the amount the invested in those instruments. Financial leverage will magnify, sometimes significantly, exposure to any increase or decrease in prices associated with a particular reference asset resulting in increased volatility in the value of a portfolio. The value of a portfolio is likely to experience greater volatility over short-term periods. While such financial leverage has the potential to produce greater gains, it also may result in greater losses.
