Responding to the Latest Attack on Managed Futures

As managed futures becomes more and more mainstream, we’re likely to keep running into more and more arguments from those threatened by their existence (stock and bond, buy and hold type financial advisors), leading to us having more and more friendly debates pointing out the flaws in their arguments.

The most recent example: Larry Swedroe, of the Buckingham Family of Financial Services, published an article yesterday that cited a study on managed futures and, ultimately, told investors to run in the other direction. Why? He makes three key points, each of which deserve to be addressed.

The impression of attaining alpha (read: returns beyond traditional asset return levels) provided by managed futures indices is misleading due to survivorship bias in the indices and fee level representation.

We’ve got a couple of problems with his position. First, he cites a study from Yale that was written based on data from some of the stock market’s most profitable years, and that was published before 2008- the year that managed futures really showed the world what they were capable of. This skews the data in favor of his argument while ignoring the huge out performance of managed futures over traditional asset classes.

Second, all indices suffer from survivorship bias. Did you know that 290 stocks have been deleted from the S&P 500 from 2000-2009? That’s 58% of the index as it stood at the turn of the century gone from the index today. 5% of the index has been deleted in the past year, which is admittedly significantly less than the 15% turnover in the managed futures indices– but probably much higher than most people realize.

But not all managed futures indices have such high turnover. In fact, we responded to a similar piece in the Wall Street Journal back in 2009, and at the time confirmed with Credit Suisse, operator of the Dow  Jones Credit Suisse Managed Futures Index that they see an average of just 3% of index constituents fall out of the index each year. That’s less than the turnover of the S&P 500.

In that same retort back in 2009, we cited a test run back in 1994 by Sol Waksman, operator of the BarclayHedge CTA Index, comparing the performance of the entire universe of CTAs in his database versus just those in the index, finding that the entire universe actually had better performance than the index.

Following up with him today, he (sadly) has not updated the results, but did have more to add to the debate.

“[To my knowledge], the Newedge CTA Index has only reported real time results since its inception in approximately 2001. And I do not believe that any of the managers included have gone out of business while in the index,” he pointed out. “In addition, our BTOP50 Index was created in such a manner as to completely avoid survivor bias, instant history bias, and selection bias. So there are plenty of examples that do not support the authors’ conclusions.”

As the kids are saying these days- pwned. (Yeah, we don’t really get it, either, but it’s supposed to be a good thing. Good job, Sol.)

Third, are you investing in the index, or in a specific program?  If investing in a specific program – then who cares about the issues inherent in an index? The specific programs’ track record is real, includes all fees, and real people have made and lost money with it (which is required by regulations, contrary to what Swedroe asserts).  If you are worried about the issues surrounding a specific program, then just concentrate on the specific program and do as much due diligence as possible on that program, thereby removing any survivorship, backfill, or other additional bias.

That doesn’t mean indices aren’t of value. Think of them as a snapshot of a given asset class or market. They are the vacation brochure which gets you interested, but not the actual experience you have once you get there….that part is up to you and the specific program you invest in.

The primary strategy utilized is trend following, which investors can replicate on the retail market.

Investors can replicate trend following on the ‘retail market’, but that replication will be far short of the real thing, in our opinion, due to thousands of factors- from the speed of trade execution to how much money and staff is spent on research and development.

The Aberration trading system was an off-the-shelf trend following system available to retail investors, which Attain has executed for clients. We can tell you factually that traders utilizing that trend following program on their own have experienced much more volatility and bigger drawdowns than a typical trend following CTA.

We’d be willing to bet that ¾ of people trading futures on the retail side are losing money. Sure, you could try to trade it on your own, but why? You could also cut your own hair, but odds are you’re willing shell out some extra cash to make sure it’s done right. Don’t cut your own hair- invest in managed futures.

These findings mirrored the findings of similar studies performed in the 1980s that found that publicly traded commodity funds didn’t create positive returns for investors. Therefore, the combined evidence shows 20 years without outperformance.

We thought we’d save the best for last. If you follow the paper trail of academic citations provided by Mr. Swedroe and the paper he cites, you find out that the data used to reach this conclusion is way out of sync with the current state of managed futures. The lack of alpha returns assertion was based off assumed average transaction costs in 1985 (you know, the 1985 that was 26 years ago…), with the data being collected from a grand total of….wait for it….20 CTAs. Today, there are around 10,000 CTAs in BarclayHedge’s database, and the total fees charged, based on the CTAs we track, looks to be about half (47% lower) of what Irwin and Borsen calculated in 1985.

The takeaway is two-fold. First off, these criticisms of managed futures are based on bad data, and in no way indict the performance of managed futures as an asset class, or the veracity of its value in a portfolio. Second, you should always check the data being referenced in commentary to ensure it’s being interpreted correctly, or you may end up falling for shoddy assessments like these.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, 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.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, 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.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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