Commodity Trading Advisors, puzzled by Fed, head for third year of losses

Thu Sep 26, 2013 7:08pm EDT
 
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By Barani Krishnan

NEW YORK (Reuters) - Long-term trend-following hedge funds are heading for a third straight year of losses unless the commodity and financial markets they trade in settle into a more predictable pattern, which does not seem likely given the Federal Reserve's mixed signals on the U.S. economic stimulus.

Known generically as "managed futures", or Commodity Trading Advisors (CTAs), many trend followers were whipsawed in the first half by market gyrations over whether the Fed would cut its bond buying this year. More volatility seems likely; last week, the Fed said it needed more time to decide.

Commodities often saw sporadic price moves this year that eluded the computer-piloted trading models of managed futures funds seeking to build out positions from trends that typically last over months.

Speculation over when the Fed will curtail its monthly bond-buying of $85 billion has been central to this year's market volatility. Since the Fed resumed its quantitative easing programs in 2010 after a brief lull, markets have bet on how long each program would last. Fed easings, which boost asset prices, caused sharp commodity gains in 2009 and 2010.

This year, some CTAs trading on shorter time horizons and focused on gold made money as bullion prices swung on speculation over the Fed. Other funds gained in the past two months by following a relatively steady rally in oil caused by Middle East tensions, and a run-up in cattle prices.

By and large, trend followers were hamstrung by commodity markets that were either flat or fickle.

"The essence of succeeding as a CTA is having the opportunity to enter and stay in a market," said Juan Carlos Herrera, managing director at Quantum Leap Capital, a trend follower in Sugar Land, Texas.

"You really need continuous movements and in one direction. If only three or four of the markets you're in are doing that, then it's going to downsize your returns," said Herrera, whose fund is down double digits as one of the bigger casualties of this year's volatility.   Continued...