Not only was 2019 a tough year, but the 2010s were a frankly brutal decade for managed futures strategies, as volatility dampened and interest rates remained stubbornly low.
Lurking in the shadows behind the S&P 500 Index’s meteoric +30% year, CTA managers and diversified quantitative macro programs yielded little more than 6% in 2019, as measured by the SocGen Prime Services CTA Index.
While 2019 got off to good start for many macro/CTA/managed futures strategies, the market twists and turns changed the return trajectory in the second half of the year and cut short the big gains of long-term, trend-following approaches in particular. The retreat of the last few months has been daunting, according to those in the space.
“Our view has consistently been that this sustained bull market, which started all the way back in March 2009, will certainly end and probably end quite dramatically, but the question is what will end it and when will the triggering event occur,” says Jason Gerlach, CEO of Carlsbad, California firm Sunrise Capital.
How varying strategies have fared depends upon how versatile they are and how diversified they are in terms of the inefficiencies they seek to capture and the time frames over which they seek to capture them, according to Gerlach.
To put it in perspective, he points to the vanishing volatility overall in 2019. Last year, the CBOE VIX was down over 42%, the S&P GSCI Livestock index was down just over 5.5% and the S&P GSCI Agricultural index was down just over 30 basis points. Everything else available to investors steadily melted upward in one of history’s best years for passive index investing of all stripes.
What will the catalyst be for a market downturn? Gerlach quips a number of options such as a state pension crisis, student loan crisis or even the current geopolitical crisis brewing in the Middle East. Chances are high, he adds, it will come out of left field.
“Uncertainty also can trigger slowdowns and sell-offs and we think investor uncertainty and nervousness should be on rise as the calendar turns away from the banner S&P 500 results of 2019 and into 2020, a year that has begun with escalating Middle East tensions and that will include a tumultuous U.S. election cycle,” says Gerlach.
Sunrise Capital is now largely a multi-family office firm that manages external assets for a select list of individual and institutional clients. The firm is celebrating its 40th anniversary in 2020, having relaunched under a new ownership group in 2015 led by Gerlach and Sunrise CIO Christopher Stanton. The firm’s investment focus remains centered around dynamic, multi-asset, multi-technique, quantitatively-informed macro approaches that seek out compelling risk-adjusted returns in a wide range of economic environments and not simply bull markets like that which has persisted since 2009.
Rather than being put in a box, Sunrise Capital prides itself on its unconventional approach to investing.
“All of our investment strategies are highly quantitative in nature and focused on capturing a wide range of statistical patterns that we believe repeat themselves in a wide range of market scenarios and can be exploited to achieve compelling, lowly correlated returns over time regardless of whether the current bull market environment persists,” says Gerlach.
He adds that a challenge faced by active, long/short investing-focused firms like Sunrise is that investors can lose patience with more defensive strategies, especially when they under-perform passive, long-only benchmarks such as the S&P 500. Coming off a year in which passive low-cost stock and bond strategies yielded some of the strongest results in decades, Gerlach opines that it is wise for investors to protect the gains they have made by pivoting at least some of their portfolio toward more active, defensive-oriented investment approaches in 2020, including one or more macro/CTA/managed futures strategies.