Trends … They are a changin’. October Commentary part 1 of 3

November 15, 2022

Click here to download pdf version: Oct 2022 Part 1 – Trends … they are a changin’



Programs and Sector Performance

October, 2022

What a difference a month makes. After September’s dispiriting performance in equities, major markets kicked off the month with a quick move to the downside, then staged an enormous, historic reversal, putting in one of the most extraordinary rallies in stock market history. Elsewhere, October was characterized by major trend changes, with some FX markets stuck in tight ranges, and strange whipsaws in fixed income. It was a decidedly mixed month for our programs. Total AUM for the firm is currently $1.08 billion.

Performance Summary:

Our flagship, the Diversified Program, gained 2.7%, and was recently ranked the #2 Hedge Fund for 2022 in the HSBC Flash Report with its YTD return of +86%, coming on the heels of its 19% return in 2021 and 32% in 2020. It is also #1 of 81 programs on the Societe Generale CTA, Macro and Currency Flash Report through October. Given our 30-year emphasis on improving our clients’ portfolios through a combination of downside protection and absolute return, we are pleased to have produced an excellent year in the most difficult market conditions since 2008.

The Diversified Program has been extremely accurate in equity trading in 2022 – profiting strongly for the ninth consecutive month in US equities – and has successfully captured the outstanding opportunities in US fixed income this year both during the extensive downtrends and during the substantial rallies along the way.

Commodities have provided some profits as well for the program in 2022, reflecting the remarkable macro environment this year. With no “Fed Put” supporting stocks and no clear sign through October that Central Banks have contained inflation, the Diversified Program is achieving its highest- ever YTD and risk-adjusted return in what should be an excellent environment looking far ahead.

Reflecting our strong belief in the long-term opportunity for our strategy, we plan to launch a new version of this program – the Macro Diversified Program — in a fund format early in 2023, with some exciting features aimed at future market risks. Look to part 2 for more information.

The Emerald Program (5-8 day holding length) gained 2.6% for October, bringing its YTD performance to +55%. It captured strong gains in US Equities to pace its return. While this program had a reasonably high correlation to CTAs during the trend-filled early part of 2022, recent sharp divergence from trend-follower performance emphasizes that this program is, at its heart, a short-term trading program with considerable contrarian/mean-reversion components. Its ability to make short duration trades against the trend and to capture longer term moves has proved invaluable this year, as it has avoided losses from sharp trend reversals such as the fixed income rally in June and several Japanese Yen whipsaws. We expect its correlation to the SG CTA Index to stabilize at about +0.3 over time. Assets in this program grew to $219 million.

Without the boost from equity trading, the Smart Alpha Program and the Smart Alpha UCITS Fund – which trade only liquid FX and fixed income markets – finished with moderately negative performance of -4.7 and -2.3% respectively. This brings year-to-date performance to +23% and +11.5%. Assets grew to $408 million for the Smart Alpha Program and $57 million for the Smart Alpha UCITS Fund.

Sector Performance- Equity

After two significant down months in August and September for equities, October ended with a historic reversal and a massive global stock rally. From “It was the best monthly return for the Dow since Jan 1976 (+14.41%), the 2nd best month for The Dow since 1936, but the Best October for The Dow ever….” And the fact that the Dow was down on the month intraday on October 13th adds to the impressiveness of the rally. It is perhaps also a reflection of the jittery and volatile state of investor psychology and the markets.

In October, a record stock market rally beginning on October 13
month-end provided excellent opportunities for our Diversified and Emerald Programs.

The Diversified and Emerald Programs were particularly successful during the very volatile period around the low of the month, on both the short side and the long side, and later as the rally picked up steam toward month end. Our shortest-term models were the most successful, as large one-day moves and tremendous intraday reversals required an extremely dynamic approach to trading.


Commodities: Machine learning models in the Diversified Program eked out a few tens of basis points of profit in energy trading. However, some losses from shorter-term models in metals and grains dragged our overall profits down just below zero in commodities. The story was exactly the opposite for the Emerald Program. The intra-month trend reversal in energies caught the slightly longer-duration models of this program offsides, and we dropped less than a percent here. In contrast, this program was positive in metals, where a slower approach was more effective.

The Diversified Program’s short-term signals allowed it to profit
slightly during a choppy month of crude oil trading.

Fixed Income: October was a particularly challenging month in European fixed income for all our programs. These markets started October with a sharp rally. Our models shorted that move successfully but incorrectly established mean reversion trades, predicting that the uptrend would resume. They lost money on subsequent days as the market fell, rather than resuming the rally.

Trading in European Fixed Income was challenging.

Several intraday reversals in the middle of the month also hurt our short-term momentum models. Finally, the move back down had us leaning short for the late month rally back up. Momentum, machine learning and breakout families were underperformers. Overall, we dropped 3-4% in this subsector for all but the Emerald Program, where the longer holding length allowed us to avoid some of the challenging back-and-forth action and reduced the losses by more than half.

In contrast, US Fixed Income trading was slightly profitable

Interestingly, US fixed income trading was up slightly for the month, with the price action keeping our models biased short throughout the month. The continuing aggressive tightening by the Federal Reserve kept pressure on this market, and it stayed closer to the lows. This signaled to our models that they should maintain more of a bearish stance. All programs had small profits here except the Emerald Program, which had a small loss.

Foreign Exchange: The lead story in FX for October was Japan’s spending a record 6.3 trillion Yen ($42.4 billion) to prop up the rapidly falling Yen. These interventions, which led to some enormous intraday reversals off trend extremes, have so far been a negative to our P&L on the days in which they occurred. However, our models managed to end October unchanged to down slightly in Yen.

The Euro, on the other hand, posed challenges to our machine learning and breakout families. The Euro rally to start the month caught our models short. We then regained some profits but just as in the European fixed income, our models turned a bit bullish as the Euro dropped back down. Unfortunately, this pattern repeated itself once more, causing losses of 1-2% for all programs.

What now?

As I write this, two important and highly-anticipated events have occurred in November. The Federal Reserve announcement and Press Conference gave Chairman Jerome Powell a chance to reiterate his firm resolve to raise rates higher and for longer than markets had anticipated. And yet, the November 10th milder than expected US CPI reading and resulting +5% equity market explosion seem to portend a Fed Pivot sooner rather than later.

My view? It’s a race against time. Check in tomorrow for Part 2.

Warm regards,

Roy Niederhoffer


PS Lisa Ferrero and I will be in Europe from December 5-9. If you’d like to set up an in-person meeting to discuss our Smart Alpha, Diversified Macro or Emerald Programs, or have a conversation about your thoughts on 2023, it would be my pleasure. Alternatively, we’d love to catch up on Zoom before year-end.