Rotella Knowledge Center

2015-08-01
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Categories: Newsletters
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By Robert Rotella, CEO, Rotella Capital Management, Inc.

Q2 Market Outlook

We may be near a secular low in interest rates which may already have been established in the first half of this year. It is possible for interest rates to stabilize or continue lower from here but the next major move should be higher. Government funding and empty promises will collide with higher interest rates and unless attitudes change the result will not be pretty. We are still positive on equity markets and the U.S. dollar and generally bearish on commodities with deflation continuing to unfold.

We have been fortunate to experience two of the greatest bull markets in both equities and interest rates. However all good things must come to an end and this one is no exception. Although we have had 6 years in a row of positive returns in the S&P500 the rally can continue as the last phase can sometimes be the most powerful one. The key will be discerning the phase we are in and trading it successfully. A secular rise in interest rates combined with a falling stock market will dramatically alter the world of traditional investing.

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2015-08-01
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Categories: Newsletters
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Rotella Capital Management Appoints Dean W. Crowder, III

CHICAGO, August 1, 2015 – Rotella Capital Management, Inc. (“Rotella”), a Chicago- and Bellevue- based adviser of systematic trading programs in managed futures and equities, today announced that industry veteran Dean W. Crowder, III has joined the firm as Managing Director & Global Head of Strategic Business Development.

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Mr. Crowder is responsible for leading Rotella’s overall marketing efforts and managing its investor relationships. He will assist in the firm’s strategic business planning initiatives to best position Rotella in the marketplace, as the firm leverages its deep experience in systematic investing. Rotella employs a number of proprietary programs using an active quantitative systematic trading approach to managed futures across global sectors in equities, currencies, commodities, and interest rates.

“Dean is a much welcomed addition to the Rotella team. His arrival is well timed with the end of QE as well as other secular trends, which should provide significant opportunities in managed futures and equities,” said CEO and CIO Robert Rotella. “Rotella will benefit from Dean’s longstanding relationships, coupled with his twenty-plus years of marketing experience to institutions, consultants, and private bankers, serving to open global distribution of Rotella’s investment programs.”

Rotella has demonstrated an unwavering commitment to excellence as a disciplined, rigorous trader, but also to its team research approach in developing advanced trading techniques in futures markets,” said Mr. Crowder. “Rotella maintains a unique position in the marketplace, as one of the most experienced and recognized managed futures firms of its kind.”

Prior to joining Rotella, Mr. Crowder founded Alpha Alternative Investments, LLC, a Texas based RIA, representing select hedge funds and alternative investments to global institutions via an affiliation with Strait, LLC. Rotella was one of Strait’s clients. He was Marketing Director at Vicis Capital, LLC responsible for the firm’s institutional introductions in the Americas, Asia, and much of Europe. Mr. Crowder was formerly Director of Marketing at Alpha Investment Management, LLC, a hedge fund of funds owned by Nicolas Berggruen, and acquired by Safra Asset Management, Inc. At Alpha Investment he established a global institutional distribution platform for the firm’s proprietary hedge fund of funds, and single hedge strategies. Mr. Crowder holds a BA in Economics from Michigan State University.

Founded in 1995, Rotella Capital Management is a Chicago- and Bellevue- based managed futures manager focused on quantitative systematic trading in global equities, currencies, commodities, and interest rate futures instruments. Rotella is led by Robert Rotella, CEO, President, & Co-CIO, Jagdeesh Prakasam, Co-CIO, and John Harper, Executive Vice President & Director of Research overseeing an internal research team of 8 quantitative analysts developing systematic futures programs.

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2015-05-07
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Categories: Blog
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Market Trend Barometer

The Trend Barometer measures the percentage of markets with medium to strong trends. Just as a thermometer reading of 32 degrees Fahrenheit equates to freezing, when the Trend Barometer reads a value that is less than 40%, market trendiness begins to get “colder” or weaken. Likewise, when the Trend Barometer gets “hotter”—that is, moves above 45% — the more markets are trending.

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There are many ways to define the concept of “trend.” The market trend index is one possible approach, which happens to be a useful explanatory factor for CTA performance. The first step in computing the market trend index is to calculate a signal to noise ratio (SNR) for asset prices over a given lookback period. The SNR is simply the absolute price change over the lookback period divided by the sum of the absolute daily price changes. For a short term trend index, a period of 10 days is used. The medium and long term indices use 40 and 80 days respectively. The closer the price path is to a straight line, the higher the SNR. A perfectly straight line will have an SNR of 1, while a completely flat path will have an SNR of 0. Below are some examples with generated data:

imageimageimage

 

In the second step, the SNR for individual futures is aggregated into an index by taking the relevant average. For example, the equity sector trend index is the average of the SNR for equity futures such as the Dow Jones Industrial Average, S&P 500 E-Mini, Eurex DAX 30 and the FTSE 100. An overall trend index would be the average among all tradable markets.

Because this market trend index is a measure of how “trendy” futures prices are, it tends to be correlated with CTA trend-follower performance over comparable time frames. Below is a plot of the NewEdge CTA index 40 day returns alongside the trend index computed for the same period:

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The correlation between these two series is 56% (R2=75%).

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2015-03-30
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Categories: Newsletters
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By Robert Rotella, CEO, Rotella Capital Management, Inc.

The World is Not What You Think It Is

The Myths and Realities of Managed Futures. There are many reasons why investors still do not allocate to managed futures versus stocks and interest rates. We will attempt to dispel some of the myths surrounding managed futures and also show some of the reasons an investor may want to consider implementing them in their portfolio. We will investigate the three main asset classes using the Barclays (formerly Lehman) Aggregate Bond Index for interest rates, the S&P500 total return for stocks, and the Newedge CTA Index (formerly Calyon Financial Barclay Index) for managed futures. Please note the returns for the Newedge CTA are hypothetical from 1990 to 1999 but are included as this period had one of the greatest bull markets in both stocks and bonds.

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Myth – Managed futures are risker than equities and interest rates. There are various ways to measure risk but two that are the most popular are volatility and drawdown. In this example we will look at drawdown. (We will consider volatility when we address returns in the second myth discussed below.) We need to normalize drawdown to appropriately compare the three asset classes and will do so by dividing the maximum drawdowns by the corresponding volatilities as shown in Figure 1. Equities clearly have the first and second worst drawdowns in 2007–2008 and 2000–2002. We can distill the information more succinctly in the following table which provides the 3 worst drawdown-to-volatility figures for the respective asset class. Here the drawdown-to-volatility ratios for their respective 3 worst periods are shown to be 2.43 for equities, 1.82 for interest rates, and, 1.87 for CTAs. Using this period and measure, it is hard to understand how one can argue managed futures are any riskier than equities or interest rates.

Figure 1

Myth – Managed futures offer poorer returns versus stocks and interest rates. We again need to normalize returns to compare performance and to do so we will divide return by volatility which will give us the familiar Sharpe ratio. We see in Figure 2 that interest rates exhibited the highest Sharpe of 0.90, followed by managed futures with a Sharpe of 0.86, and then equities with a Sharpe of 0.75. This suggests that managed futures have offered competitive risk-reward ratios versus interest rates and stocks in one of the greatest bull markets for equities. Interest rates beat both equities and managed futures but we will have more to say about this in the second to last point below.

Figure 2

Myth – Futures are riskier because you can lose more than your investment. This point needs to be better understood. An investor can lose more than their investment usually by two means: one of which is going short and the other is leverage. As both of these are possible in futures as well as other investments like interest rates or stocks it should be apparent that futures are not necessarily riskier. If one is concerned about losing more than the principle of the investment then a fund investment should be considered where the loss is limited, although it should be pointed out that there have been a few instances of investors losing 100% of their money in properly managed futures investments. However, there are far more instances of bond defaults as well as stocks becoming worthless.

Myth – There is no fundamental basis for returns from managed futures. The gist of trading managed futures is detecting and profiting from trends. In the excellent book Trend Following with Managed Futures, Greyserman and Kaminski apply a simple trend following method and backtest it on markets from over 700 years ago to the present with reasonable results. This at least suggests that markets are not random but have exhibited orderly trends over an exceptionally long period of time. Will they persist? Perhaps an equally compelling question is will the bull market in equities and interest persist?

Figure 3

Myth – Futures contracts are relatively new and unproven. Au contraire. Equities have a history dating to around the 1500’s. Interest rates and futures go back to ancient Mesopotamia to the code of Hammarubi and possibly even further. Many of the wise ancients saw an important need for futures that many “financial experts” still now do not understand.

Myth – Managed futures fees are high. The Newedge CTA Index includes all fees charged by the respective managers. Since the performance numbers after fees compare favorably with equities and interest rates then the fee issues should be a moot point.

Have we missed the great move in managed futures? Many managed futures programs have had above average returns in the past 12 months. Investors are loathe to buy the top in any market. However, if we look at Figure 3 and the rolling Sharpe of the Newedge CTA Index versus stocks we see periods of over as well as underperformance. Stocks tend to outperform managed futures during strong bull market runs which should not come as any surprise. Overall the periods of outperformance can be brief or extended. Therefore it is possible managed futures may return to weaker performance but no less possible it may continue to outperform stocks. Furthermore even if managed futures underperform equities in a raging bull market it does not necessarily imply negative performance. We see similar results in Figure 4 with managed futures versus interest rates. Curiously if an investor is concerned about buying the top in managed futures after a 12 month run is there any more concern for being long equities after a 6 year run or interest rates after a 30+ year run?

Figure 4

Correlation – In Figure 5 we note that the Newedge CTA Index correlation with equities is less than zero and only slightly correlated with interest rates. This slight positive correlation is probably partly due to the generally long position in interest rates many CTAs have had in the past 15 years. However, this may soon come to an end if the bull market in interest rates ends.

Figure 5

Figure 5

Managed futures had a slightly lower Sharpe versus interest rates as noted in the second myth discussed above. However, is it reasonable to assume that interest rates will continue to provide similar returns in the next 25 years that they have provided in the past 25 years? For example ten year notes were yielding around 8% in 1990 and now hover in the 2% region. Where is the upside from here – negative rates? Rates have gone from high double digits to sometimes negative depending on the country and term. And that does not even include the real possibility of default.

Combining managed futures with interest rates and equities, in Figure 6 we see a definite improvement in performance by including an allocation of managed futures to a portfolio of interest rates and equities. Each allocator needs to adjust the exact percentage to fit the investor’s needs.

We hope you find this analysis helpful and look forward to hearing your comments about this topic.

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2015-03-30
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Categories: Newsletters
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By Robert Rotella, CEO, Rotella Capital Management, Inc.

Q1 Market Outlook

We believe we are entering a new economic environment which will prove more favorable for managed futures. This is partly due to the ending of quantitative easing as well as differing needs of various central banks, ineffective central bank policy, and the inability of governments to sustain confidence or act prudently.

We are still bullish on interest rates and stocks but are becoming increasingly concerned about the sustainability of the bull market in bonds. We will address this point in the next quarter. It is true we are in the seventh year of a bull market in equities, but there can be other reasons why this market may move higher. We are bullish on the dollar against most currencies and generally bearish on most commodities.

 

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