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Jeff Diercks
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Jeff Diercks, is an investapreneur and recovering CPA. He actively trades his own money and manages the assets of a select group of clients at InTrust Advisors, a Tampa, Florida based wealth management firm focused on trend following and price momentum strategies utilizing ETF securities. Mr.... More
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  • Chart Of The Week–Psycho Risk On / Off Trade 0 comments
    Nov 30, 2012 1:48 PM | about stocks: SPHB, SPLV

    CNBC recent ran an interesting article originally published in the Financial Times called the Wrong Sort of Volatility Hits Trend Followers. In the article, they make the case that trend followers (often called CTAs) are suffering through one of the longest periods of disappointing returns in recent history. The average CTA, according to the article, has lost more than 7 percent in the past two years alone.

    The article attempts to find the culprit for this underperformance. In the author's opinion, it is the "wrong volatility." Specifically, he states "in a risk on risk off environment, such trends quickly reverse, causing painful losses. Worse, the prolonged volatility often causes the computers running CTAs automatically to reduce their leverage, meaning that even when they are making money, it is far less than it should be."

    So I thought we would take a look at this risk on / risk off volatility (called RoRo) in this weeks chart. Here is a chart of the relative performance of two recently minted ETFs, the PowerShares S&P 500 High Beta ETF versus the PowerShares S&P 500 Low Volatility Portfolio ETF (Low Beta).

    Notice how tough the markets have been since mid-September for trend followers with constant risk on / risk off rotation within a very narrow trading range. During September to-date period alone, CTAs have lost more than -7% according BarclayHedge and their NewEdge CTA Trend Sub Index.

    Here is a weekly chart of the same two ETFs and their relative performance. Unfortunately, these ETFs have not been around for long so the chart only goes back to mid-2011. However, you can easily see the same RoRo throughout the period that has yet to lead to any sustained trends for these CTAs.

    One final note is that these two charts reflect RoRo for the equity markets only between differing sectors on a risk on / risk off basis. This is generally only one component of most CTAs portfolios so it would be interesting to see the same analysis for the other commodity, fixed income and/or currency markets they trade. Maybe in a future post!

    So what do you think? Let us know, leave a comment below.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: SPHB, SPLV
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