Investors went into the month content that the Greek crisis was now, at least somewhat, averted and the Chinese stock market had finally had its long-dreaded bloodletting.  On August 11, however, the People’s Bank of China (“PBoC”) devalued the Chinese yuan by nearly 2% and allowed it to depreciate further over the next two days.  With the move re-igniting worries about a Chinese hard landing, over the next two weeks risk assets all over the world sold off – culminating in the world’s equity markets downward corrections on August 24.
 
The consensus view is that the Chinese economy has slowed faster than investors had anticipated. Economists always expected its transition from an export- to service-based economy to come at the price of growth. But more recent economic data began to stir even more concern, and the recent stock market sell-off put a fine point on things.  The PBoC’s exchange rate adjustment may have helped the short-term somewhat, but it has been expensive and has left the markets confused.  Since the move the Chinese government has been selling an estimated $8-9 billion (USD) per day (according to Bloomberg) to stay in the desired exchange rate range.  Moreover, for its Asian neighbors the Chinese move was unexpected, and it takes the markets some time to sort out what reactions are “contagion” and which are simply fundamental relationships.
 
One economy that has also been going through this “sorting out” process is the U.S.  Going into the month the U.S. economic indicators had continued to stay relatively strong, and the majority of analysts were betting on a Fed rate hike in September.   However, the events of July and August put new cards on the table for the Fed.  Not just the recent global stock market correction, but also recent comments from the ECB suggesting they may actually increase quantitative easing – as European economists have been lowering their estimates of both growth and inflation.  
 
Global Macro:  As is often the case in volatile months, there is no single profile of returns for macro programs during August.  Although the Credit Suisse Global Macro Index registered down -2.63%, the observed programs in the industry appeared to be a mixed bag. Common to most of the profitable programs were the lack of substantial long equities positions and short fixed income duration positions. Many were also short Asian currencies ex Japan.  These were featured in many of the macro strategies on Hydra, which as a group were generally positive in August.  The best performer ended the month up +0.40%.
 
Systematic Trend:  The Newedge Trend Index was flat to slightly down in August.  But, like the global macro index above, this average does not reflect the wide dispersion among returns. There have been very few months in the last 20 years where we have seen a nearly “binary” separation between winners and losers in this sector.  That separation depended on how the trader was positioned in a very small handful of markets.  How a trend follower did in August was largely decided almost entirely by (1) whether the program was long or short the equity sector going into the month (and to a lesser extent, long or short crude oil), and (2) how such positions were managed during the market bounce-back on August 26.  Several trend followers on Hydra that were up double digits simply due to equities and energy alone.  Ironically, some dependable veteran programs took hits due to being on the other side.  
 
August shows that one cannot generalize that trend followers can all be lumped in one uniform bucket.  Longer-term and Donchian-style programs were likely not short equities at the start of August, but triggered their shorts late into the slide.  As a result of the volatility, under a classic long-term trend follower approach their stop levels were stretched out.  The combo can pose a double whammy for such programs.  Those with more medium-term triggers may have caught the slide earlier into the downside breakout with tighter stops. 
 
Commodities Strategies:  The late-month equity correction affected different commodity markets in different ways. It sparked a sharp month-end bullish reversal in metals and energy markets, yet seemed to have much less impact on agricultural markets.  The latter group generally continued their downward trajectory, accelerated by the August 12 USDA crop report.  Many discretionary ag traders that entered the month long corn and soybeans were thwarted by the USDA report, which announced record high levels of yields in corn and soybeans.  Nonetheless, the BarclayHedge Ag Traders Index finished up +0.35%.  Six of eight commodities programs on Hydra reported positive months in August, the outperformer being a fundamental agricultural trader based in Memphis, TN, up +7.25% for the month.  
 
Currency Strategies:  The market disruptions in August largely spurred rallies in the G10 currencies while most emerging market units declined sharply. Managers that were short the EM slide generally fared well.  Locking in gains from the rallies in major currencies was a more daunting task, as most surrendered 50-75% of their gains by month-end.   Trend-based and carry-based strategies tended not to capitalize on these moves,   which seemed to be caught largely by value and shorter-term/mean reversion traders. All FX programs on Hydra were positive for the month, with the largest bringing in +4.40%.
 
Short-Term / Higher Frequency:  While the “short term” camp is typically the most diverse of any style category, most of the returns for August were unexpectedly negative.  Not surprisingly, the equity sector was the greatest source of setbacks for diversified ST traders. Our Hydra Short-Term index ended the month negative.

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.