Historic Rally in Treasuries and the Effect on Managed Futures

Given the recent extreme moves in US Treasury yields, the team at PivotalPath analyzed managed futures funds and their exposure to Treasuries to help understand and put into context potential implications.

As you may know, in the span of eight trading days between March 8^th and March 17^th, 2023, there were massive moves across the US Treasury yield curve including in the US 2-Year Treasury, which rose an unprecedented 2.4% (while the yield fell from 5.0% to 3.8%) – the largest move in a single calendar month going back to 1998, when our data began.

The swift rally across the curve would clearly have a large negative impact on funds that are short Treasuries, including managed futures funds/CTAs. For our analysis, we will use the Bloomberg US Treasury Index, ticker: LUATTRUU, (BUST) as a proxy for Treasury notes and bonds. To better understand the magnitude of exposure to Treasuries, we took a quick look at our correlation screener within our Managed Futures Index (MFI) and sorted the funds by highest (negative) beta as follows:

It has been widely reported that managed futures funds have been positioned short Treasury futures in size, as denoted by the CFTC and referenced in a recent Reuters article here. This is also illustrated by the 18-month rolling beta of MFI to BUST in the following graph: 

The MFI has exhibited an increasingly negative exposure to Treasuries since February of 2021. For context, there is only one brief time in history, the fall of 2007, when exposure to BUST has been more negative since our data began in 1998. Additionally, the MFI has not been negatively exposed to BUST since a short stint in 2011 and the summer of 2007 before that.

An OLS (ordinary least squares) regression over the last 18 months yields MFI=-1.27*BUST-1.40% alpha (R2=0.70), in annualized terms. The high R2 indicates a strong linear fit, as evidenced by the scatter plot of monthly returns.

The SG CTA Index, which tracks a smaller universe of managed futures funds on a daily basis, generated a loss of 9% between March 8^th and March 17^th.  This is consistent with expected losses based on the exposure found in our model. For perspective, the loss represents more than 50% of MFI’s gain for all of 2022 and would represent the largest calendar month loss in our data going back to January of 1998.

Lastly, the sharp increase in exposure (in absolute terms) is at odds with the spike in underlying Treasury volatility and the historical relationship between the two.    

Please let us know if you would like to learn more about our tools by emailing inquiry@pivotalpath.com.

About PivotalPath

PivotalPath is a trusted hedge fund industry expert. Harnessing its hedge fund research portal, PivotalPath enables a diverse set of institutional investors with over $300 billion in combined hedge fund investments with valuable insights and necessary tools for informed investment decisions.

Through our dedicated research team, we have built significant trust and lasting partnerships with hedge funds through transparency and by ensuring that allocators evaluate each manager in the right context. PivotalPath protects confidential manager information and only shares insights with its institutional investor clients.

Jon Caplis serves as PivotalPath’s CEO, responsible for setting the firm’s strategy and overseeing all aspects of the firm’s operations. Mr. Caplis also serves on PivotalPath’s board. In his 10 years of direct hedge fund experience, Mr. Caplis served as co-head of portfolio allocation and risk management at Campbell & Co., a multi-billion dollar systematic hedge fund.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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