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Polaris was down -0.15% (net) for September. Despite the modest setback, Polaris closed the books on Q3 with solid outperformance versus the SG CTA index this month and throughout the quarter. September did provide some headwinds with low signal-to-noise (SNR) readings (a measure of trend strength where low equates to lack of trend) throughout in all four trading sectors (Commodities, Currencies, Equities and Interest Rates), yet the program navigated a less trend-friendly environment respectably. In fact, the longer term systems were the least impacted by conditions, with intermediate-term trading models trading profitably and long-term models essentially flat. The short-term systems struggled more with mean-reversion systems, recording modest losses and short-term breakout models

the most challenged this month. All-in-all, as we look ahead to the last quarter of 2018, there is reason for optimism.

The major news themes playing out to start the month included a focus on weather (a devastating typhoon in Japan and a major hurricane in the US), ongoing trade war rhetoric between the US and China, lack of progress between the US and Canada in hammering out a new NAFTA deal, and the new Italian government’s budget negotiations. In addition, central banker banter in Japan and actions in Turkey and the US caught the attention of bond, currency and equity markets.

Prior to the trading roundup, we’d again like to share with you some interesting readings which caught the attention of our research group. They include:

  • A Critical Review of Recurrent Neural Networks for Sequence Learning, by Zachary C. Lipton, May 29, 2015 
  • “Benchmarks as Limits to Arbitrage: Understanding the Low-Volatility Anomaly,” by Malcom Baker, Brenda Bradley, and Jeffrey Wurgler, Financial Analyst Journal, Vol 67, Number 1
  • “Wiggins: Detecting Valuable Information in Dynamic Networks Using Limited Resources,” by Ahmad Mahmoody, Matteo Riondato, Eli Upfal 

Commodities:    +1.05% (gross)

Portfolio positioning in commodities at the start of September was long energies and short metals and agricultural markets. Throughout the month, commodity VaR exposure increased by about 40% as some strong trends did appear in the energy markets which were the sole performance drivers. There were a few price reversals intra-month to keep things interesting, including at the start as oil prices sank when a tropical storm headed for the US Gulf Coast did not materialize (as feared) as a hurricane. Later, rumors and reports that OPEC and non-OPEC nations were planning to boost production caused another price reversal. By month end, however, as the NYMEX Light Crude Oil chart below indicates oil prices hit new (multi-year) highs. In fact, a Wall Street Journal (WSJ) article (“Oil Edges higher to Close Out Third Quarter” by Christopher Alessi and Amrith Ramkumar, dated September 28, 2018) noted that oil’s global benchmark was on track for a 5th consecutive quarter of gains citing indicators that lean more in the direction of a global supply deficit as the primary reason. Those indicators include: (1) Iranian oil exports are declining in anticipation of US sanctions which will take effect in early November; (2) OPEC and other oil producing nations have been cryptic regarding how much they intend to raise production; and (3) US officials have not shown an inclination to tap into the country’s strategic oil reserves anytime soon.

While incurring modest losses in metals trading, gold trading was profitable. In looking at the COMEX Gold price pattern in the chart below, it wouldn’t initially jump out that our trading results would come in positive for this month. The chart also highlights some of the rather trendless trading conditions encountered this month. Gold did, however, manage to find a trend at month end, selling off courtesy of the Federal Reserve’s interest rate hike.

Trading in agricultural products was essentially flat.

Currencies:     +0.35% (gross)

Polaris maintained a “long US Dollar (USD) versus (any) global currency” stance throughout the month, and the VaR did increase over the month by about 22.5%. Central bankers provided a major assist for our positioning this month. Turkey’s central bank was the sole exception with its decision to raise the nation’s prime rate to 24% rather than the expected 21% levels, but our USD/Turkish lira trading losses were minor. The biggest trading gains were garnered from our Japanese yen/USD and Swiss franc/USD trading. The Bank of Japan’s Governor Kuroda confirmed at the start of September that he had no plans to raise rates “for quite a long time,” and to close out the month, the US Federal reserve raised the US prime rate. The ICE Dollar Index chart below is another example of where the price moves were not going our way for much of the month, yet the program still managed to generate positive results.

Equities:     -0.51% (gross)

The program maintained its long positioning globally and the highest VaR exposure in this sector, although it did decrease slightly (8%) by month-end. The bipolar-like reactions to every trade-related utterance made by government officials explained some though not all of the reasons for the losses sustained in this sector. On the bright side, Japanese equity trading posted strong returns and contributed greatly to keeping the downside manageable for this month. After processing the tragic news of one of the worst typhoons to hit Japan in 25 years, the SIMEX and Osaka Nikkei indices shot straight up (see SGX Nikkei 225 chart below). Japan’s Central Bank’s confirmation that it had no plans to raise rates provided some of the momentum as a weaker yen would help Japanese exports. A short article in the WSJ (“Paladium Rally Leads Sudden Rebound in Metals” by Amrith Ramkumar, dated September 24, 2018) primarily explained the persistence of the bullish run in the palladium market over the past 7 months, but it also shed a bit of light as to why this small metal market may have provided support for Japanese and Chinese equity rallies this month. Palladium is used heavily in the auto industry and as the article goes onto say:

Investors look at industrial metals-widely used in manufacturing and construction-broadly to gauge growth world-wide. A months-long price slide in these markets had eroded investor confidence, pushing money managers int US assets throughout the year.

Yet recently, some analysts appear much more confident that a full-blown trade war and slowdown in China won’t materialize. Japan’s Nikkei Stock Average just had its best two-week stretch since July 2016, and the Shanghai Composite logged its best week in 20 months.

Although Japanese markets rallied, September was not as kind to India’s Nifty 50 index, which underwent a major reversal since attaining new highs this summer and provided the program with its biggest trading losses. The market tanked in September under the weight of rising oil prices, the rupee weakening to its lowest level ever vs USD and liquidity concerns related to India’s non-banking financial companies. Hong Kong’s Hang Seng Index also had a rough month and quarter and is down overall on the year since reaching new highs in January. A weak yuan and Hong Kong dollar and trade war concerns have kept the index in bearish territory.

Over in Europe, trading results were again negative. The chart of the Euro STOXX 50 Index helps to highlight the reasons as the Euro STOXX ended September at about the same levels where it started, but the ride in between was rollercoaster-like. Losses were sustained not only in this market but in (Spain’s) Ibex, (the UK’s) FTSE and the (German) Dax. The only market with a positive result was (Italy’s) MIB-30.

In US trading, it was the Russell 2000 which dragged on what was otherwise profitable trading in North America. The trendless price movements (illustrated in its chart below) chopped away at profitability and the index closed lower on the month. Despite our long positioning in this midcap index not being opportunistic this month, the raging US bull market cannot be attributed entirely to the FANG-effect (FANG=Facebook, Amazon, Netflix and Google) as this WSJ article (“It’s Not All Tech. Small Stocks Are Powering the Market Higher” by Corrie Driebusch, dated September 16, 2018) cites:

Signs of stock market breath are everywhere investors and analysts say: Smaller-company stocks have climbed more than their larger counterparts this year. …Among the quiet winners in the current market are midsize companies. When divided into five groups based on market value, the second and third quintiles of the Russell 1000 index are outperforming the top quintile that houses the biggest stocks, according to data compiled by Strategas Securities LLC. …Indeed, without the 10 biggest contributors – which includes Amazon, up 68% – the S&P 500 would be trading higher. The equal-weighted index, which gives the same weight to both the smallest and largest companies in the index, reached a record in late August – the same day as its more closely followed counterpart.

Interest Rates:     -0.93% (gross)

This sector continues to be a drag on overall performance and, unsurprisingly, ended the month with the lowest VaR exposure of any sector, incurring a 22% drop along the way. There was mixed positioning here as Polaris was long European Union (EU) bonds across all time frames and short all the US interest rate markets. As can be seen via the September price trajectory of EUREX Euro-Bunds in the chart below, being long the Bund was not a boon to the program. Trading in (German) bonds in all time frames, (British) gilts and French government bonds contributed sizeable losses. The European Central Bank (ECB) continues to want to exit the “easy money” policies which all central banks employed for almost a decade, but it has greater challenges in moving forward as aggressively as the Federal Reserve because EU growth has been muted, and the ECB now sees yet another possible hurdle as to whether the new Italian government’s level of inclination to show any kind of budgetary restraint. As for the Bank of England (BoE), there is better economic growth which brings with it inflation concerns, but it has remained hesitant to pursue rate hikes because of the imminent approach of BREXIT. Still, reports published in September indicated that inflation is accelerating in the UK, which had investors expecting the BoE to make a move and, invariably, translated to gilt prices moving inversely to the expected rate increase. Fortunately, US positioning helped to neutralize some of the losses as the strong economic results in the US have allowed the Fed to pursue a more aggressive rate hike policy. The CBOT 5-year chart shows the smooth trend that US bonds had for most of the month and explains the profitable results in US interest rate trading.

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