Key Takeaways
- • Commodity Trading Advisors and managed futures funds face a third consecutive year of losses due to unpredictable market conditions driven by Federal Reserve stimulus signals, with trend-following models unable to capitalize on sporadic, non-directional price movements.
- • Fed tapering speculation has created significant market volatility in 2013, whipsawing CTAs that rely on sustained, multi-month directional trends; the Fed's September announcement that it needed more time to decide on curtailing $85 billion monthly bond purchases has prolonged uncertainty.
- • Selective gains emerged in shorter-duration gold trading strategies that capitalized on Fed-driven bullion volatility, oil rallies from Middle East tensions, and cattle price run-ups, but these opportunities remain exceptions rather than the norm for the broader CTA universe.
- • Successful trend-following strategies require continuous directional price movements; flat or erratic commodity markets in 2013 have prevented CTAs from establishing and maintaining profitable positions, according to Juan Carlos Herrera, managing director at Quantum Leap Capital.
Summary
Long-term trend-following hedge funds, generically known as managed futures or Commodity Trading Advisors (CTAs), are heading toward a third consecutive year of losses as Federal Reserve policy uncertainty continues to disrupt the sustained, directional price movements these strategies depend upon. The primary challenge stems from the Fed's mixed messaging regarding its quantitative easing program, which has created persistent market volatility that computer-driven trading models cannot reliably exploit.
Through 2013, CTAs have been significantly hampered by erratic commodity price action rather than the sustained trending patterns their algorithms are engineered to identify and trade. Speculation over the timing of the Fed's potential tapering of its $85 billion monthly bond-buying program has been the central driver of this volatility. The Federal Reserve's announcement in September that additional time was needed to decide on curtailing stimulus prolonged this uncertainty, preventing the market clarity that trend followers require. Since the Fed resumed quantitative easing in 2010, markets have consistently bet on the duration of each stimulus program, creating boom-and-bust cycles rather than stable directional trends.
While managed futures strategies have historically benefited from Fed-induced commodity rallies—such as those observed in 2009 and 2010—this year's market structure has proven largely unfavorable. Some CTAs with shorter time horizons focusing on gold did generate returns by trading gold's volatility amid Fed speculation. Additionally, select funds profited from a sustained oil rally driven by Middle East tensions and a run-up in cattle prices over the past two months. However, these isolated gains mask broader performance headwinds: most commodity markets have remained either flat or erratic, preventing trend followers from establishing meaningful positions.
According to Juan Carlos Herrera, managing director at Quantum Leap Capital, a trend-following firm based in Sugar Land, Texas, the fundamental challenge is straightforward: "The essence of succeeding as a CTA is having the opportunity to enter and stay in a market. You really need continuous movements and in one direction." The absence of such conditions in 2013 has effectively eliminated the structural advantage these managers traditionally possess, positioning another difficult year for the managed futures industry.
Through 2013, CTAs have been significantly hampered by erratic commodity price action rather than the sustained trending patterns their algorithms are engineered to identify and trade. Speculation over the timing of the Fed's potential tapering of its $85 billion monthly bond-buying program has been the central driver of this volatility. The Federal Reserve's announcement in September that additional time was needed to decide on curtailing stimulus prolonged this uncertainty, preventing the market clarity that trend followers require. Since the Fed resumed quantitative easing in 2010, markets have consistently bet on the duration of each stimulus program, creating boom-and-bust cycles rather than stable directional trends.
While managed futures strategies have historically benefited from Fed-induced commodity rallies—such as those observed in 2009 and 2010—this year's market structure has proven largely unfavorable. Some CTAs with shorter time horizons focusing on gold did generate returns by trading gold's volatility amid Fed speculation. Additionally, select funds profited from a sustained oil rally driven by Middle East tensions and a run-up in cattle prices over the past two months. However, these isolated gains mask broader performance headwinds: most commodity markets have remained either flat or erratic, preventing trend followers from establishing meaningful positions.
According to Juan Carlos Herrera, managing director at Quantum Leap Capital, a trend-following firm based in Sugar Land, Texas, the fundamental challenge is straightforward: "The essence of succeeding as a CTA is having the opportunity to enter and stay in a market. You really need continuous movements and in one direction." The absence of such conditions in 2013 has effectively eliminated the structural advantage these managers traditionally possess, positioning another difficult year for the managed futures industry.
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