October was a pre-holiday gift for stock market bulls: One of the smoothest, drama-free rallies in a long time. As more and more market players are assuming the chances of the U.S. Federal Reserve raising interest rates diminish, earnings take center stage. As as evidence of the increase of equity complacency, the VIX stayed below 20 for the final 2/3 of the month. 

The S&P 500 Index climbed a spectacular 8.5% during the month, something that was echoed by overseas’ indices as well. Even concerns about China’s effect on the global markets seem to have subsided for the moment, as Asian markets also benefited from international policy decisions as well as on the hope that central banks will provide stimulus for their economies. The Shanghai Composite finished up 10.8% for the month. 

That said, housing sector news was mixed and some other key fundamental economic indicators continued to fall short of expectations, but investors seemed largely undaunted. U.S. Bond yields rose slightly in October. Even though market bulls have started to roll their eyes at Fed warnings these days, the Fed indicated that a rate rise might indeed be still be in store for December if economic indicators remain broadly in line with consensus. While some celebrate the U.S. and European market recoveries from their tumble in late summer as further proof of the market’s resilience, a longer term perspective indicates that such optimism may not be well-founded. More seasoned analysts are eyeing the current market as a potential “selling” opportunity. The performance of our Hydra programs was mixed across the board in October, depending on strategy and markets traded.
 
Global Macro: Although many macro programs fell prey to choppy sideways markets, two sectors did serve up some profits to fundamentally-driven managers. Obviously any manager nimble enough to see value in the G10 equities markets rode a nice rally. Also, the credit markets, particularly those of emerging markets, offered several profitable opportunities. The Hedge Fund Intelligence Macro Index ended the month up +0.83, and Hydra’s best macro program finished the month up +2.93%.

Systematic Trend: October was a very challenging month for systematic trend managers. With the exception of equities, most market sectors showed sideways, choppy markets – the very type of activity that can erode returns for a trend follower. As a result, almost all key systematic trend indices were down on the month, sending them flat to slightly down on the year as well. The Newedge Trend Index lost -2.46% year to date, although Hydra’s best trend follower ended the month up +3.84%.

Commodities Strategies: Despite showing some life at the start of the month, most commodities markets ended the month flat. Crude oil looked like it had launched a rally in the first week, only to slide back. One of the only truly active markets was natural gas, which lost 13% this month on strong storage additions and continued gains in market share of North American electricity production. In the agricultural markets, the U.S. production numbers showed a downward revision for wheat, corn and soybeans, however, global productions were revised upwards, remaining at record highs. On balance, the grains complex just consolidated at its current range. The lone holdout was sugar which, due to continued crop-threatening rain in Brazil, rallied 13% on the month. This made for a tough time for any commodities trader trying to catch a prolonged movement, with the exception of natural gas programs. The BarclayHedge Ag Index returned -0.83%, and Hydra’s best commodities manager finished up +4.17%.

Currency Strategies: Despite initially dipping due to some weaker data releases, the U.S. Dollar gained against the Euro and Yen as the FFI gave further indications of a December rate hike. In the aggregate, the ECB commented that rates would be headed in the opposite direction. The Euro fell 1.5% and the yen fell 0.6% against the USD over the month. The U.S. Dollar index gaining 0.6%. Unless they were exploiting the dollar move, most technically driven FX managers faced challenging, erratic markets. The emerging currencies were particularly difficult to trade as they fell on the U.S. Fed’s comments yet resurged somewhat on the European commentary. Conversely, programs that had benefited from the breakdown in carry and stuck with the fundamentals favoring the EUR and CHF saw this turned upside down. The Barclay Hedge Currency Manager Index Index ended the month up +0.49%.

Short-Term / Higher Frequency: While longer-term systematic managers faced challenges, the autumn resurgence in short-term programs appears to be continuing. The Hydra Short-Term Managers Index finished the month up +2.60%. Our best short-term program for the month gained +12.04% on the month.

Jon is CEO of Kettera Strategies, the operator of Hydra — a platform registered with the U.S. Commodity Futures Trading Commission — that allows qualified investors access to easily invest in a carefully curated array of CTA, FX, and Macro strategies.