FTC Update 12/2009: Investor letter from FTC CEO Eduard Pomeranz

The main feature of December was a strong correction in the foreign exchange markets, which ultimately also contributed to the biggest loss to date for a single calendar year in our diversified futures funds. In light of this, and also because I feel it is more suitable at the end of the year, I will review the results for 2009 in detail.

It is a fact that our systematic trading models were unable to meet long-term expectations in the 2009 market environment. They fell short of the risk-return goal. This is painful for FTC as a management company whose fees are based on results, and – much more important to me – is unsatisfactory for you as investors.
It is also a fact that our strategies are still within the ranges to be expected in the long term. In the core segment of diversified managed futures, we again ranked amongst the top of the world in 2009, however paradoxical this may seem. This is no exaggeration, and I am happy to prove it.
Another fact is that systematic investment approaches generally and systematic trend-following models at FTC (and comparable providers) in particular have functioned significantly better since the start of the financial crisis than other management concepts, including typical hedge funds.
Since the intensification of the crisis after the Lehman Brothers bankruptcy, they have been light years better. This means that anyone taking a serious look at the performance of managed futures along the lines of FTC Classic will look beyond 2009, and at least consider it in relation to 2008 or a longer period. This shows clearly how the strategy has fully performed its function as a risk constraint in bear cycles.
With a managed futures fund such as FTC Classic or Dynamic, investors were able to partially or even fully hedge their equities exposure in the period 2007-2009, depending on the portfolio mix (see Fig. 1 on the next page).

The decisive factor here was the extraordinary result in 2008. This was made possible by an ideal environment for trend followers, with strong and lasting markets trends emerging from a low volatility environment in 2007. The low volatility meant that the trend follower logic aligned with the lasting trends sooner than in periods of high market volatility. Such conditions were previously likely to occur perhaps once in a decade. Statistically, the risk-return ratio in calendar 2008 was 1.5 standard deviations better than the average for the system expectation. 2009 was another unusual year. First, the long overall trends were terminated in mid-March by the sharp V-shaped recovery in the equities and primary commodities markets. However, the extreme volatility in autumn and winter 2008/2009 meant that the volatility-based stops were far removed from the turning points. This was the main reason for the steep losses by trend follower systems in the first half year.

A comparison of FTC Futures Fund Classic, DJ Euro Stoxx 50 since the start of the bear market. Average change in value: theoretical portfolio with 50% of each asset*

The realignment with the new trends was also late. The reason was that the market risk level also determines the entry signals, and the risk ratios decreased slowly because of the historical extremes in 2008. In the S&P 500 Future, for example, around two-thirds of the recovery had already happened before all the trend following logic took a long position. Also, key markets then moved into a quieter mode (low volatility, low trading volume, with multiple breaks in trend), resulting in a weakly positive second half year. At the end, 2009 was a mirror image of 2008: the risk-return relation was again 1.5 standard deviations away from the expected average – but on the wrong side. To exaggerate somewhat, we could say that: 2009 was the price for the excess returns in the previous year. If you are one of those who saw this coming, then I take my hat off to you. I did not see it, and anyway, as a manager FTC is paid to invest on a strictly systematic basis, without using discretionary forecasts.

Modified Sharpe ratios and annualized returns for the FTC futures Funds, compared with average results for the internal peer group of 15 of the biggest CTAs worldwide. These include funds from AHL, Aspect, Lynx, Transtrend, Winton. Period: end-2007 – end-2009.

The fact that the price was actually relatively modest is clear from a simple comparison between the two annual results (profits in 2008 vs. losses in 2009). This is also borne out by a comparison with the international leaders among the CTAs (see Fig. 2). This success – which I regard as considerable – is due to the combination of systematic risk management and the new non-trend-follower subsystems. Don’t get me wrong here – I am not trying to gloss over a clear loss. 2009 was the weakest calendar year in history for the Classic strategy, and the worst in the entire history of systematic CTAs, at least since 1999, and possibly since the start of the records (this will only become clear when the key indices publish the full-year figures). This is another fact that needs to be made clear. However, this does not mean that the strategy itself has failed.

To put it bluntly, if you want at least a chance to achieve a rare and outstanding result on the lines of 2008, you inevitably have to accept a result like 2009.

The same holds true for our primary commodity product, which is essentially based on the same logic as our diversified products. While the S&P Commodity Index is still almost 40 % down since year-end 2007, despite the recent price increases, the Commodity Alpha is still showing a two-year gain of 13 %.

This means that the fund met its target of improving the risk-return ration in a primary commodity portfolio (see Fig. 3). The situation is somewhat different for the annual result of our FTC Gideon I equities model. The fund also produced an excellent performance in 2008 – a decrease of 5.5 % for a long-only approach was virtually unequalled, even among other systematic equities strategies. In 2009, however, Gideon I was behind in profiting from the upswing. One reason was again the late re-entry into the market (the first long signals did not appear until May). Conversely, the futures overlay implemented in February 2009, which has since traded 50 % of the fund capital, had little effect over the summer in the low volatility environment. Over the whole year, the overlay was largely neutral in terms of the result. The annual gain of 5.63 % is accordingly 5-6 percentage points below the result which the trend following logic alone would have achieved. I am going to be totally honest with you about it: this is an unsatisfactory result.
Does this mean it would have been better not to implement the futures overlay? If we look at 2009, the answer is yes. But we all know the benefits of hindsight. Given our inability to foresee the future, I am convinced that the decision to imple-ment the overlay was correct. Unfortunately, the risk reducing advantages of the overlay strategy did not come through in performance in the first year of application.
In the long term, however, the benefits should make themselves felt, and I am quite sure that the fund will show a convincing performance over the long investment horizon it is conceived for, even in industry comparisons. We will accordingly continue to work on improving the details of FTC Gideon I, without abandoning the basic logic.

Finally, it is still too early for our latest strategy, systematic tactical as-set allocation, to make definitive observations. This FTC model has been implemented since September 2009 (I think we have been trading this since May/June) in Global Fund Selection Growth (the multi-asset umbrella fund-of-funds for Sparkasse Schwaz). Here again, however, I am very confident. I believe that the fund is one of the hottest candidates just now in the category of asset management investment funds, particularly as a core component for private portfolios. I hope that you will not only forgive me for this unusually long management re-port, but will also have found one or two suggestions which will help your future plans. If you want more information on any of the topics discussed, please e-mail me at ep@ftc.at.

In any event, I should like to take this opportunity to thank you for your trust, and to wish you a happy and successful year 2010.


Eduard Pomeranz, CEO

 

Legal Disclaimer:

The contents of this documentation are intended solely for reasons of not-binding information and shall neither be interpreted as an offer nor as a solicitation to buy or sell, or a recommendation in favour of, any financial instruments. Offering memorandums, annual reports, semi-annual reports as amended from time to time of all funds mentioned herein can be obtained in particular with FTC Capital GmbH. On request we will announce further institutions which provide fund specific documents as well as the date of the last publication of the offering memorandum in Austria or in jurisdictions in which the funds are authorised for public distribution. Each investment is subject to a risk. Performance data refer to the past. Past performance is no reliable indicator for future results. Warning: The results of investments can go down as well as up and may be affected by changes in rates of exchange. No warranty is made as to the accuracy, completeness of actuality of the information contained in this document. Global Fund Selection Growth is managed by FTC since September 2009. Former data is not representative for the new strategy.

Warning notice and risks:

Every investment involves a risk. Fund prices may rise or fall. Performance data refer to the past. Past performance is no reliable indicator for future results. Performance data does not consider any front end load.
Warning notice for FTC Futures Fund Dynamic: This fund denominates in USD. The return may increase or drop due to fluctuations of currencies.
Notice for Global Fund Selection SICAV – Growth Fund: Global Fund Selection SICAV Growth Fund is managed by FTC only since September 2009 – past performance cannot be compared with the new strategy; however, it is published due to legal requirements.

 

 

 

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