In at the Highs, Out at the Lows

Do you learn from your mistakes? Do your neighbors, colleagues, or the rest of society? It seems that the answer is usually no; and especially no when it comes to the toxic investment cycle of getting in at the highs and out at the lows. We see time after time that this dangerous cycle transcends asset classes, market environments, and Fed chairperson.  We’ve talked before about the dangers of the emotional investment cycle, and after getting the last of the 2014 data on asset flows – we can see Managed futures is the latest case study. Just take a look at the performance of Managed Futures when asset flows are overlaid onto the chart.

Managed Futures Performance vs asset flow(Disclaimer: Past performance is not necessarily indicative of future results)
Source: Barclayhedge CTA Index

People could not have been much more wrong, with outflows of -$63 Billion over the two years ending June 2014, right before managed futures went on to rip off average index gains of +12.32% in the next 6 months. Now granted, those folks who bailed for the exits were looking at being down over the preceding three year period. But it’s not like we’re talking the internet bubble burst. The indices we down about –4.09% over that same time span (July 12 – June 2014). And it’s not like someone didn’t cue Wilson Phillips and say we were at a generational low.

The more troubling sign is that the people didn’t just get in at the bottom – a lot of money got in at the top as well, having poured $44 Billion into managed futures following gains of $7.56% between Jul 2010 and April 2011. What does this mean for the rest of 2015, where money should be flowing into the asset class following an impressive year?  Only time will tell, but we’ve got a feeling this isn’t quite performance chasing at this point. Wait until managed futures puts in a good two to three year stretch – then you’ll see the hot money running for the asset class…. just in time to suffer through a down to flat period.

Meanwhile, those who’ve been invested in managed futures for 10 years or more must just sit back and laugh at the flows in and out, knowing what they know – that it is a mutli-year investment which rewards investors for patience. They know that managed futures is much different than a typical stock market investment. The stock market sees consistent gains interspersed with periods of sheer terror. Managed Futures, in contrast, is consistent frustration/boredom, interspersed with periods of elation when big market trends emerge.

PS –  How big is the Managed futures industry, really? This is something we get into now and again, and just this week MorningStar reported that investors have seen the light, putting $1.4 Billion in Managed Futures Mutual Funds in the first two months of 2015. Now, Mornigstar just tracks mutual funds… not the overall space including managed accounts and privately offered funds. For that, we turn to BarclayHedge, who’s been tracking managed futures assets for 20+ years, and come up with total assets under management by managed futures firms at  $316.8 Billion.

There’s just one little problem, those numbers include the world’s largest hedge fund ($220 Billion Bridgewater).  And they include Winton. Now, we agree that Winton should be included, even if David Harding dropped an ‘f bomb’ in the Financial Times claiming they’re not a Managed Futures firm, just weeks before winning the Managed Futures Pinnacle Award last year.

For those who might want to see what the industry is looking like without Winton & Bridgewater inflating the numbers, here’s our try and stripping them out. While that downward sloping curve may send some of you running for the hills, this is exactly the sort of dis-interest those looking to get out of the toxic ‘in at the highs, out at the lows’ cycle should welcome.

Asset Flows of Managed Futures ex bridgewater winton(Disclaimer: Past performance is not necessarily indicative of future results)
Source: Barclayhedge CTA Index

DISCLAIMER: The stats herein discuss the growth of assets under management both from new money invested and gains/losses on past money invested. It is not intended to portray performance of the asset class.

 

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The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

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