Kettera Strategies Heat Map - July 2023

The Style Heat Map below offers a snapshot for the month on all categories of strategies; here are highlights on four of the more noteworthy during the month of July.

Systematic Trend Managers

Trend programs were generally unprofitable in July, with most programs struggling in fixed income and currencies, mixed results in equities, yet a noticeably profitable trade in long energy and refined products, although not enough to offset losses elsewhere.  Medium-term trend programs (e.g., those with 2-3 week average holding periods) seem to have performed the worst, underperforming (still negative) longer-term trend and shorter-term momentum strategies. One losing position of particular note was a long Japanese fixed income which, after the BoJ relaxed its yield curve control policy, quickly corrected. Long various USD-based currency positions also suffered corrections. Equities trading was mixed. While long North American equity indices have been” easy to capture” trend this year, many systems have been chopped up by indecisive moves in the European and Asian indices.  

Quant Macro Managers

Quant Macro was a mixed bucket in July, slightly tilting positive but full of dispersion across markets, sectors and programs. Despite mixed messages and a range of good and bad announcements everywhere, July was a “risk-on” month where equities rallied, energy markets rallied sharply, fixed income markets fell (yields up), and base and precious metals were up on perceived stimulus policy in China.  One consistent theme across most of the profitable programs was long energy markets. Other commodities markets didn’t show much meaningful performance plus or minus. It seems the currency sector was either very good or bad, depending on whether a program’s models were short USD (good) vs. G10, and especially JPY and commodity currencies (MXN). Fixed income was flat to slightly negative, depending on one’s exposure and geographic choices: short US (good), long UK gilts (good), short Euro bunds (good), long JGBs (bad). Little performance was seen in agricultural grains, softs, and metals markets.

Discretionary Macro Managers

Discretionary macro managers, in contrast to their quant brethren, are a mixed bucket by their very nature. Yet many, if not most, of the managers we follow appeared to have a positive month. In speaking to the PMs, and reading various monthly reports, macro managers had to make a decision as to where the world is in the business cycle – as well as whether cycle stage was isolated to just one region (e.g., North America vs China) or global. Those managers that shifted their positioning from an “inflationary” or “stagflation” stance to a “decreasing inflation with gradual growth” stance fared the best. In directional positioning, most of the discretionary programs that we follow captured gains from long global equities positions, long precious metals, and, in currencies, a generally short USD position. In contrast, directional positions in the energy sector and fixed income (not including yield curve trades, which was a different story) appeared to pose setbacks. Regarding relative value and spread positions, a common theme among the outperformers was capitalizing on yield curve inversion.  

FX Specialists

The returns of FX specialists varied broadly in July, but were generally sub-par. The month began with a sharply declining US dollar vs. G10 and EM, sparked by declining U.S. inflation numbers and hopes of a soft landing putting a stop to Fed rate hikes. This didn’t last long, however, as strong mid-month GDP releases ignited a rally in the greenback making for choppy trading. This down-up, “V” -shaped activity in the USD frustrated many managers. The better performers were those able to pivot more quickly on the USD turnaround. And US inflation wasn’t the only driver in July, as increased oil prices also bolstered the currencies of petroleum producing countries (e.g. Norway, Mexico, etc). Overall, systematic trend and quant directional FX traders generally fared poorly in July. Cross-rate and carry positions appeared to perform slightly better, at least judging from the programs we follow, but not by much.

Commodities Specialists – Metals & Energies

Managers focused on industrial commodities generally performed well in July, led by positions in natural gas and energy (crude and products), although there was good news in some of the metals markets as well. Most programs in this style bucket are fundamental and discretionary, so differentiation comes from implementation (relative value vs directional) and instruments traded (futures or options). Nat gas spread traders performed well -  despite sideways movement all month long - while long directional and long-biased spread traders took advantage of a 14%-plus upward move in crude as well as rising markets in refined products (e.g. gasoline and heating oil). In metals, long directional positions in base metals, primarily copper and nickel, were profitable, while long directional and long-biased options positions in gold, silver and platinum also brought gains.

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Kettera Strategies

Notes:

For the “style classes” and “baskets” presented in this letter: The “style baskets” referenced above were created by Kettera for research purposes to track the category and are classifications drawn by Kettera Strategies in their review of programs on and for the Hydra Platform. The arrows represent the style basket’s overall performance for the month (e.g. the sideways arrow indicates that the basket was largely flat overall, a solid red down arrow indicates the basket (on average) was largely negative compared to most months, etc.). The “style basket” for a class is created from monthly returns (net of fees) of programs that are either: programs currently or formerly on Hydra;  or under review with an expectation of being added to Hydra. The weighting of a program in a basket depends upon into which of these three groups the program falls. Style baskets are not investible products or index products being offered to investors. They are meant purely for analysis and comparison purposes. These also were not created to stimulate interest in any underlying or associated program. Nonetheless, as these research tools may be regarded to be “hypothetical” combinations of managers, hypothetical performance results have many inherent limitations, some of which are described below. no representation is being made that any product or account will achieve profits or losses similar to those shown. in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. one of the limitations of hypothetical results is that they are generally prepared with the benefit of hindsight. in addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. there are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results..

Benchmark sources:

1. Blend of Eurekahedge Macro Hedge Fund Index and BarclayHedge Global Macro Index
2. The Eurekahedge Macro Index
3. The Société Générale Trend CTA Index
4. The Société Générale Short-term Traders Index
5. The Barclay Hedge Currency Traders Index
6. Blend of Bridge Alternatives Commodity Hedge Fund Index and Barclay Discretionary Traders Index (for February only the Barclay index was used as the Bridge index was unavailable.)
7. The Barclay Agricultural Traders Index: (same link as above)
8. The Eurekahedge Commodity Hedge Fund Index
9. Blend of CBOE Eurekahedge Relative Value Volatility Hedge Fund Index and CBOE Eurekahedge Long Volatility Index (same link)
10. Blend of Eurekahedge Multi Strategy Asset Weighted Index and Barclay Hedge Fund Multi Strategy Index

Indices and other financial benchmarks shown are provided for illustrative purposes only, are unmanaged, reflect reinvestment of income and dividends and do not reflect the impact of advisory fees. index data is reported as of date of publication and may be a month-to-date estimate if all underlying components have not yet reported. the index providers may update their reported performance from time to time. Kettera disclaims any obligation to verify these numbers or to update or revise the performance numbers.

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The views expressed in this article are those of the author and do not necessarily reflect the views of AlphaWeek or its publisher, The Sortino Group