Volatility and fluctuations in commodity and currency markets have continued to drive trends in the managed futures/CTA industry in 2017: numerous high-profile elections in Europe saw the euro fluctuate as markets responded to the election victories of Mark Rutte, Emmanuel Macron and Angela Merkel. The Brazilian real weakened in May amid corruption allegations against President Temer, and strong growth in US GDP over the course of Q3 2017 saw the US dollar strengthen. In July, the price of copper hit a two-year high following reports that China might move to ban imports of scrap metal; and while the price of gold fluctuated over the course of the year, the safe-haven asset has gained from the lows seen in January 2017. Oil saw a sharp trend reversal in the middle of 2017, as Saudi Arabia and Nigeria announced plans to cut its production, and US output showed signs of a slowdown; these events drove the price of crude oil to its biggest daily and weekly gains of 2017, kick-starting a trend by which the price of crude oil continued to rise in Q3 2017 to over $50.
These trend reversals and volatile conditions are reflected in the 2017 return of the Preqin All-Strategies CTA benchmark: below water for four months and above for five months of the year, the benchmark sits at -0.04% as at September 2017, a stark contrast to the nine positive months and 8.04% return of the Preqin All-Strategies Hedge Fund benchmark over the same period, as seen in the chart pictured below. With CTAs providing potential diversification from equity markets, they have struggled in a year which has seen major stock markets around the world continuously reach record highs.
The first quarter of 2017 saw price swings across various commodity markets create challenging conditions for CTA managers. The US dollar recorded its worst January in three decades, only to rebound to seven-week highs in late February amid expectations of an upcoming Federal Reserve interest rate hike. Copper experienced strong price swings as a potential increase in US infrastructure spending pushed up the price of metal, only for value to drop as concerns around supply eased. CTAs ended February relatively neutral as losses in March drove the quarterly return underwater, with trend-following strategies finding these price-reversing conditions particularly challenging, posting a loss of 1.19%.
CTAs were in the black for the second quarter of 2017; however, the 0.13% return did not offset the Q1 losses. The quarter began well with gains in April (+0.51%) and in May (+0.46%), but a loss of 0.83% in June all but erased previous gains. In Q2 2017 there was significant fluctuation in the price of crude oil. Late into May, OPEC announced that it had agreed to extend production cuts into 2018; however, markets responded negatively – perhaps hoping for deeper or longer cuts – prompting the price of crude oil to drop by 5%. Falling oil prices continued into June and reached 10-month lows as WTI crude oil fell below $43; however, a decrease in the US oil rig count, as well as more demand from China, drove prices up, as the commodity ended its worst H1 in almost two decades on a more positive note.
All CTA sub-strategies posted a positive return in Q3 2017, with the Preqin All-Strategies CTA benchmark posting returns in the first two months of the quarter. Oil prices continued to rise throughout Q3 2017, with Brent crude oil reaching its highest price levels in over two years by the end of September. Counter trend strategies that look to pick the top and bottom of the market returned 0.90% in Q3 following strong gains in July (+0.65%) and August (+1.06%) amid the reversing oil prices. Gold prices delivered similar returns to CTAs in Q3 2017, with gains in July and August offsetting a loss in September, as geopolitical tensions drove investors to buy the precious metal before hawkish sentiment on interest rates from the Fed caused the value of gold to fall. While the majority of CTA strategies have delivered negative or neutral returns in 2017 YTD (as at September), CTAs pursuing option-writing strategies have returned 7.63% over the same period, outperforming credit (+6.13%) and relative value strategies (+3.28%) hedge funds. This marks another strong year for option-writing strategies after posting the highest annual CTA sub-strategy returns in 2015 and 2016.