In Search of the Educated Investor

It’s not often we agree with managed futures critics, but this time around, we’re making an exception. A recent piece in the Wall Street Journal told the story of a man who passed on the managed futures mutual fund MutualHedge Frontier Legends Fund. We’re not a huge fan of the managed futures mutual fund in general; we prefer the liquidity, transparency and lack of load and sales fees you can get from managed accounts. But our admiration of Rick has nothing to do with the Legends fund itself. No, for us, it was the why:

Rick is a 50-something investor from New Orleans, whose financial adviser has been pushing him to move some of his assets into a “managed futures” fund, saying it will smooth out results.

The sales pitch he’s getting for the MutualHedge Frontier Legends Fund amounts to “Managed futures held up well during the last financial crisis,” and “This is what sophisticated investors do.”

While both of those points are technically correct, Rick’s not that sophisticated, which is why getting into MutualHedge Frontier Legends (US:MHFAX)  would be the Stupid Investment of the Week.

Stupid Investment of the Week highlights the concerns and characteristics that make a security less than ideal for average investors. It’s written in the hope that showcasing one worrisome situation will make it easier to sidestep danger elsewhere. The column is not intended as an automatic sell signal, and in fact the investors who have slugged more than $825 million into Frontier Legends since it opened at the end of 2009 might be pretty happy they’re in it.

My hope is that the bulk of those investors don’t fall into the “average” category, if only because they should be getting solid explanations from the advisers who sell MutualHedge Frontier Legends. Rick, by comparison, wasn’t getting those kinds of answers, and that alone would make it hard for him to get comfortable with any managed-futures fund.

Did you catch the important lesson in there? It has nothing to do with the Legends fund, or mutual funds, or managed futures performance. For us, the most important takeaway was this:

My hope is that the bulk of those investors don’t fall into the “average” category, if only because they should be getting solid explanations

Replace the word generic term “average” with “uninformed,” and this article makes a lot of sense.

If you’re looking at a managed futures investment, and the bulk of the pitch you’re getting is related to 2008, you should absolutely be running in the other direction. First of all, past performance is not necessarily indicative of future results. To base an investment off of one sliver of asset class performance is ill-advised no matter what the label is. Second, if you’re working with someone who favors generic explanations over taking the time explain one of the more complicated investments on the market (no matter what wrapper it’s in), they’re doing you a disservice. There’s a chance they can’t  explain the nuances because they don’t understand the investment themselves. This goes back to our newsletter about using caution when selecting financial professionals to work with.

No one should invest in managed futures without becoming educated on the asset class. It’s why we dedicate the time we do to our blog, newsletter and so on. An educated investor has more realistic expectations, and can make decisions that are better suited for their investment goals. And that’s the kind of investor we’d rather work with. After all, isn’t good decision-making the point?

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