The Polaris program recorded a net return of +2.66% for the month of August. Returns were positive in 3 of the 4 sectors (Commodities, Equities, Currencies, Interest Rates) with the Commodities sector leading the way. Opening the month net short agricultural products and metals, and long energies, US dollar and equities, the Program also was positioned short US, but long UK, European and Japanese interest rates markets. The medium- to long-term systems garnered the bulk of the profits. Although slightly down for the month, short-term breakout and mean-reversion models served as a valuable diversifier to Polaris’ trend-following lean.
The trade war fallout dominated economic headlines and claimed several casualties in its wake. Most metals markets were down (yet again), some quite significantly. The Turkish lira really took it on the chin, but its fall also created repercussions in other markets, including emerging market equities and agricultural commodities. Contributing to the lira freefall were Turkish accusations that the US used an imprisoned American pastor as a bargaining chip in stalled trade negotiations. In frustration, President Trump threatened stiff levies on Turkish steel and aluminum imports. More to the point, it was Turkey’s massively-leveraged corporate sector, in combination with the weakened lira, that concerned traders and led to the “contagion” sell-off elsewhere. Meanwhile, US equities rallied as did most markets in the energy complex.
With all that was going on in August, you would be right to think there would be little time for much else here at RCM. However, we thought it might be interesting to share certain articles or books that recently have captured our research team’s attention. Here is this month’s sampling:
- “The Statistical Consequences of Fat Tails” by Nassim Taleb, The Technical Incerto, VOL 1
- Advances in Financial Machine Learning by Marcos Lopez de Prado<
- “Multiple Imputation in Principal Component Analysis” by Julie Josse, Jerome Pages and Francois Husson, Advances in Data Analysis and Classification, October 2011, Volume 5, Issue 3, pp 231-246
We’d like to close by relating some great news which we received from BarclayHedge. We are very pleased to report that our Rotella Polaris’ performance was ranked top 10 in BarclayHedge’s “Diversified Traders Managing More Than $10MM” category for July 2018.
Commodities: +1.41 (gross)
The trade war blues throttled most metals markets. Silver prices dropped -7.2% in August and Polaris’ positioning was on the right side of that trade. While Gold was down (-2.2%) – the 5th month in a row matching the longest run of down months since 2013 – there was less opportunity for profit here with a modest loss registered. What was somewhat different this month was a very strong showing by the Agricultural subsector. Most of the markets in this subsector (24 traded this month) provided modest gains but Coffee, Rubber and Corn trading paid handsomely. Polaris’ short positioning in these markets was aided by the (aforementioned) Turkish lira “contagion” effect which had traders exiting emerging market commodity (and currency) markets for safer assets. Energy trading yielded positive returns in all markets except for Natural Gas with Gas-Oil providing the biggest gains. A decline in (US) domestic oil inventories and US sanctions on Iran caused overall supply concerns fueling the upward trajectory of Crude Oil and energy prices overall throughout August.
Equities: +0.87% (gross)
It was a pretty rocky ride for equity markets to start the month, but the program made a nice recovery in 2 of the 3 (Asia-Pacific (APAC), Europe (EU) and North America (NA)) subsectors with all but EU delivering negative returns. Some upside was provided by US hammering out a new NAFTA agreement with Mexico, although a new agreement with Canada remains elusive. As the Wall Street Journal (WSJ) noted in late August, dovish comments during the annual US Federal Reserve meeting in Jackson Hole boosted US equities and led to new record highs in the S&P 500, Russell 2000 and NASDAQ Composite. Another WSJ article by Steven Russolillo & Mike Bird (August 22, 2018), “As US Bull Market Powers Ahead, Rest of World is Left Behind,” seeks to explain why US equities have continued to lead all other global equity markets. It cites that while the US was the first hit by the 2008 global crisis, it was also the first region to make its way out of the morass. Much credit is also due to US economic dynamism from companies like Amazon and Apple which continue to lead the way in terms of technological innovation. Meanwhile, Mr. Russolillo and Mr. Bird explain, Europe is still burdened by and has been slow to recover from the sovereign debt crisis and, in Asia, Chinese equities have been hit by trade war concerns. APAC trading was up +0.17%(gross), EU was down -0.72%(gross) and NA returned +1.43% (gross).
Currencies: +0.95% (gross)
A strong US dollar showing in the first half of August was certainly bolstered by the Turkish lira’s precipitous decline which, as mentioned above, spread to other emerging markets currencies. As can be observed in the ICE Dollar Index price chart below, the demand for the dollar slowed in the latter half of the month but the dollar still closed out the month higher. Besides the lira trade, strong performance was also obtained with US Dollar cross trading versus APAC currencies, the ruble and Swedish krona. The Swedish krona fall was related to upcoming September elections in Sweden which threaten the status quo.
Interest Rates: -0.55% (gross)
Trading in this sector mainly was stymied by modest losses sustained in several of the US short-term interest rate instruments coupled with a moderate setback in the program’s Japanese government bond trade. Robust gains courtesy of long positioning in European medium- and long-term bond holdings helped to cushion the blow.