December 31, 2017

The DRC Global Diversified program gained 7.9% in December on the back of a strong trend in EUR/USD and rising crude oil prices. However, looking back on the full year 2017, the program lost 10.11% as many markets were trapped in narrow price ranges in an extremely low-volatility environment.

Although 2017 was a challenging year for DRC, the performance was not incomprehensible in relation to the program’s 26-year performance history. By many metrics, 2017 was the best-ever year for investments with “risk-on” exposures as almost everything produced stellar returns. The following is a sampling of the records broken across asset classes:

Equities: The S&P 500:

  • Had a “perfect year” - the first time in its history that it was up every single month of the year.
  • Had the longest ever stretch without a 3% correction (279 business days and counting).
  • Had the longest ever stretch without a 5% correction (373 business days and counting).

Equity volatility:

  • The VIX index fell to its lowest level in history at 9.1%.
  • Realized volatility (1-year monthly) of the S&P 500 fell to its lowest level in history at 3.9%.
  • 18 of the 20 lowest ever readings of the VIX index were registered in 2017.

Fixed Income: Interest rate volatility fell to its lowest level in history.


  • The European High Yield credit spreads fell to less than 2%, their lowest levels in history.
  • The US Investment Grade credit spreads fell to the lowest level since 2007.

Foreign Exchange: Implied and realized volatilities in foreign exchange fell close to their lowest levels reached in 2014 and 2007.

This is an extraordinary time in global financial markets. Nearly a decade of liquidity injections by central banks, totaling over $11 trillion, has created a surreal, risk-less environment where everything only goes up and every dip is an opportunity to buy more. It seems that investors’ confidence in this regime continuing has never been greater. However, against this “everything is going up” backdrop, the ground is gradually shifting. The Federal Reserve hiked rates 3 times in 2017 and is likely to hike a similar amount in 2018 while reducing the size of its balance sheet. The ECB is halving its asset purchase program at the beginning of 2018 and will most likely end it during the year. In total, central bank asset purchases are expected to decline by $1.6 trillion in 2018 compared to 2017. And interest rates are expected to rise.

Moreover, with valuations rising to higher and higher levels and leverage and investor confidence increasing, the margin of error is getting narrower. A relatively small change in expectations and risk perception may trigger in a large market move, possibly wiping out years of returns. If history is a guide, trend following CTA programs like ours may do very well under these circumstances.


Bill Dreiss, President
Dreiss Research Corporation