KMLM Q3 Review: Quiet After the Storm – Trend Following Finds Its Footing
Q3 Index and Sector Performance
The KFA MLM Index, which is tracked by the KraneShares Mount Lucas Managed Futures Index Strategy ETF (Ticker: KMLM), finished the quarter up 2.4%. Commodity (+1.9%) and Global Fixed Income (+0.9%) markets contributed to results while Currency (-1.4%) markets detracted. Interest income added 110bps. For the twelve months ending September 2025, the Index was down 5.9%. Year to date, the Index is down 3.2%
Q3 Index and Sector Exposures
Over the course of the quarter Commodity exposures went from net short 6% to net short 9%, Currency exposures went from net long 84% to net long 54%, and Global Fixed Income exposures went from net short 128% to net short 37%.
Q3 Review
The third quarter was, all things considered, pretty quiet. With the One Big Beautiful Bill passed and the Israel-Iran War over, there was more clarity around tariffs, allowing markets to start pricing in long-term movements with greater certainty. A break from the whipsaws that have plagued the trend for the last few years. While volatility is good for trend, direction is required. With a bit of quiet, a falling Japanese Yen (“carry trade” back on), dove-ish Fed, and AI, AI, AI…global stocks ripped higher on the quarter. Under the hood, the Consumer Price Index (CPI) remains a concern, as does a slowing economy outside the tech sector, with rate-sensitive sectors in outright recession. The Index starts Q4 positioned for lower rates in the US, a weaker Dollar, short Crude Oil (but long Heating Oil and Unleaded Gas), long Gold and Live Cattle, and short grains.
In the commodity sector, the top three contributors were Natural Gas, Gold, and Live Cattle, while the bottom three detractors were Copper, Soybeans, and Unleaded Gas. Grain markets saw little price action as markets entered peak growing season. Conditions were good, and a lack of buying from China as trade negotiations play out, led to flat to down prices, with Wheat dropping the most and benefiting the Index short position. In metals, Gold continues to rise as demand for the precious metal outstrips supply. Inflation fears, weaponization of the Dollar, central bank buying, and retail demand are all drivers. Copper was challenging for the long-trend position, with expected tariffs driving prices up towards the end of July, only to be completely reversed, and the entire gain in the position was wiped out in a single day. In the energy sector, markets have been range-bound with no clear trend. This has led to a split in positioning, with Crude Oil short, and its refined products, Heating Oil and Unleaded Gas long. The short position in Natural Gas performed well during the quarter. In agriculture, both the short in Sugar and the long in Live Cattle remained productive trends, delivering strong gains. Major shifts in exposure during the quarter included Copper (long to short), Crude Oil (increased short), Heating Oil (increased long), Natural Gas (increased short), Soybeans (short to just long back to small short), and Unleaded Gas (short to long).
In the currency sector, the Canadian Dollar, British Pound, and Japanese Yen were the primary detractors. With the Index positioned for a weaker Dollar and a stronger foreign currency, coming into the quarter, short positions struggled as the Dollar firmed up slightly despite the Fed becoming more dovish and cutting rates in September. All things considered, however, these were not significant currency movements, remaining largely range-bound throughout the quarter. The Yen was probably the biggest mover on the quarter, with the Index moving from long to short during the month of July into early August. Given that this move started close to the trailing moving average, the quick position switch limited losses. Notable exposure shifts during the quarter occurred in the Australian Dollar (increased long), Canadian Dollar (reduced long), and Japanese Yen (long to short).
In the global fixed income sector, the primary contributors were UK Long Gilts, Japanese Government Bonds (JGB), and the Euro Bund. Canadian Government Bonds (CGB) were the only detractor. A bit of interesting positioning in global bonds at the end of the quarter, with the US and Canada both long, and Europe/UK and Japan short. While US and Canadian bonds rallied throughout the quarter, bonds in Europe/UK and Japan remained near their recent trading lows. Major shifts in exposure included the CGB (from short to long) and 10-Year US Treasury Notes (short to long).
Net Market Exposures
Holdings are subject to change.
For KMLM standard performance, top 10 holdings, risks, and other fund information, please click here.
Index returns are for illustrative purposes only and do not represent actual Fund performance. Index returns do not reflect management fees, transaction costs, or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.
Term Definitions:
Carry Trade: a strategy where investors borrow in a low-yielding currency or asset to invest in a higher-yielding one, aiming to profit from the interest rate spread.
Dovish: a central bank stance that favors lower interest rates and looser monetary policy to support growth, even at the risk of higher inflation.
BPS: basis points, a unit equal to 0.01% used to measure changes in interest rates or other financial percentages.
Net Long/Short Exposure: A futures contract is an agreement to buy (long) or sell (short) an asset at a predetermined price at a specified future date. The exposure is calculated by the position size (negative if short) times the value of one contract.
