The CME pushing a Gamble? Think Again

Yet another piece has come out from someone with little understanding of managed futures and a bullhorn at his side. This time around, Allan Roth (of CBS, no less) is taking the industry to task after hearing what he believed to be a misleading presentation at The Money Show in Las Vegas (what happened to ‘what happens in Vegas…)

The presentation was made by the CME’s John Labuszewski, where the standard arguments for choosing managed futures were presented (non-correlation, crisis performance, etc.). At the conclusion of the presentation, after discussions with Labuszewski, BarclayHedge’s Sol Waksman, and CME Associate Director of Communications Michael Shore, Roth had made up his mind- this was shady business.

We, obviously, have a problem with his article. Multiple problems, actually. First, it doesn’t appear he attempted to research the industry he’s commenting on before printing his piece. Throughout the text of the article, he admits that he does not have a lot of knowledge about managed futures investments, and yet, at the end of the article, he feels confident enough to proclaim, “I think the odds of making money are better at the Las Vegas casinos than the managed futures casino.”

Secondly, his piece is a thinly veiled attempt to undermine the credibility of the actors referenced. Instead of explaining the mechanics of survivorship within his conversations with Waksman, he brings up poorly contextualized legal concerns that have no impact on his overall conclusions regarding managed futures. He speculates that the CME and money managers are somehow in cahoots to bamboozle investors. What? Evidence? Anywhere? Bueller?  And conversations with some of the involved parties since the piece was published have revealed that many of the comments were taken out of context and twisted to create a sensationalized story. That’s not journalism- it’s smoke and mirrors.

But most of all – he’s just wrong. Let’s look at his arguments one by one.

Futures make all the sense in the world for the likes of the farmer and the food processor that both want to lower risk by setting the price of corn ahead of time. They both win and the CME Group should be applauded for providing this service.

This is an overly simplistic view of how futures markets operate. Speculators, not consumers, take the bulk of the other side of producer’s hedges; and vice versa – with speculators, not producers, taking the other side of consumer’s hedges. It is speculators that allow the farmer and food processor to lower their risk by setting the price of Corn ahead of time. It is speculators who allow for the transfer of risk. Why are we constantly repeating ourselves?

Speculators, on the other hand, are part of a game that has a zero sum outcome and provides no insurance benefit.  [and later.. This means that, in the aggregate, not a penny has ever been made in futures.

Not true – the farmer and producer are also part of this ‘game’ as you call it. In fact, they are the ones (along with self directed online futures traders) who usually take the loss that professional speculators (i.e. managed futures) count as a win.  Why are the farmers and producers willing, and able to, take a loss? Because their loss in the futures market is a win (in terms of a successful hedge) in the cash market in which they operate in.

As Dr. Thomas Schneewis of the University of Massachussetts and Dr. Richard Spurgin of Clark University explained in their 1996 paper, “Managed Futures, Hedge Fund and Mutual Fund Return Estimation: A Multi-Factor Approach,” “As important, while futures and options markets are a zero sum game, that is, daily gains must equal daily losses for market participants, academic research [Schneeweis, 1996; Chan et al., 1996]  has shown that the existence of arbitrage returns, convenience yields, and returns to providing liquidity as well as the existence of trending markets due to institutional and market trading characteristics may provide a source of positive return for CTA and hedge fund managers.”

I personally don’t buy into the Barclay CTA Index of a self-selected and self-reported sample of managed futures being presented as representative of the industry as a whole.

Not sure how to respond to this, except to say we completely disagree.  Our opinion of the BarclayHedge CTA index is that it is very/highly/completely representative of the managed futures industry as a whole.  Our quick proof on short notice:  1. It has a correlation of .84 and .93  to the other two leading Managed Futures Indices (Dow Jones Credit Suisse and Newedge) , and 2. It has 565 of the 1100 (51%) registered CTAs the NFA reports to be actively trading (the S&P 500 has 500 out of 7,950 stocks (just 6%) on the NYSE by comparison – do you feel the S&P is representative of stocks?).

I suspect the reality is that the managers have made a bundle off of investors, assisted by the CME. In fact, I think the odds of making money are better at the Las Vegas casinos than the managed futures casino presented by the CME Group.

We could trot out all sorts of real life managed futures programs which have made money for investors over time (and programs which have lost money)[past performance is not necessarily indicative of future results]. Like any investment, there are winners and there are losers. But to imply that because there are winners and losers in an investment area means the whole investment is a scam (aided and abetted by a well respected, highly capitalized company like the CME) is out of line in our opinion.

Have you heard of Occam’s razor, Mr. Roth?   What is more likely…. That there is a giant conspiracy put on by the likes of the CME, BarclayHedge, Attain, and tens of thousands of others in the managed futures industry;  which has duped institutional investors, family offices, pensions, high net worth individuals, regulatory agencies, and everyone in between into investing over $291.4 billion into managed futures in the belief that they add a benefit to portfolio….. or that they actually do provide the benefit?

We’ll respectfully side with the actual users of managed futures who are allocating their hard earned dollars to managed futures over your opinion based on some likely out of context feelings from Vegas.  As for your thoughts that you are more likely to make money in a Las Vegas casino than in managed futures – would you care to stake some money on that? You seem to be in a betting mood… and we like our odds.

Bottom line- the article was a poorly constructed and poorly supported attack on an industry that we (and the CME, and BarclayHedge, and thousands of others) have seen with our own eyes provide needed diversification to investors. 2008 was not a scam. The CME is not making up the fact that managed futures outperformed stocks (either with or without dividends) during the financial crisis. And nobody is covering up that managed futures performed poorly in 2009. Not all managed futures programs will match the indices designed to track them, but more will than not in our opinion.

Before Mr. Roth attacks the industry again, we urge him to contact us with any questions he may have, read the posts on this blog, and peruse our database of educational newsletters. We aren’t trying to pick fights, and everyone is entitled to their opinion. But it is a real shame to see people attack an industry because it is new and misunderstood.  Managed futures provide a real benefit to investors in our opinion, and to summarily dismiss them as no better than gambling at the casino without digging into the research or asking people who have been there is just not right.

8 comments

  1. All these CTA indices contain not just selection bias but what is known as survivor bias. A CTA that shows 5% returns for a couple years than has a 40% drawdown and goes out of business and doesn’t report the 40% loss.

    The lack of correlation with the S&P also is simply a function that many CTAs trade interest rate futures that correlate negatively with the S&P.

    An investor allocating a portion of to bond funds will achieve the vaunted diversification supposedly provided by managed futures

  2. Barry,

    Thanks for your comment. We are happy to respond.

    First, you will find bias in any index, which is why they are best used as a general guide with which to get into specific programs. If worried about selection or survivivorship bias, throw out the index data and just focus on the program you are looking at investing in. Asking what has its drawdown been, how long has it been around, and what are risks and rewards for the specific program remove any index bias.

    Second, interest rate futures may be a part of the lack of correlation, but it’s also that they trade commodities, and currency futures, too. More importantly – that they can go long and short, versus long only for the S&P.

    Third, bonds, from what we’ve seen in our research, cannot give the same diversification as managed futures. In testing a standard 60/40 stock/bond portfolio against a 36/24/40 stock/bond/managed futures portfolio back to 1995, we find that the return is nearly identical, but that the volatility of the stock/bond portfolio is 1.3 times higher (10% vs 7.6%) and the Max DD nearly 2 times higher (-32% vs -17%). There is also the fact that bonds have just come through a three decade bull market and rates are at historic lows. Should interest rates rise significantly, bond funds will struggle mightily.

    Let us know if you have any further questions. Cheers!

  3. Lauren,

    I think we can agree that charts showing the value of $1,000 invested since 1980 in managed futures are highly misleading in that they don’t show the programs that have catastrophic (or even medium sized) drawdowns. No one has an incentive to report such drawdowns.

    I agree that looking at individual CTAs is a prudent course of action. Investors should look not just at correlation with equity and debt investments but also the standard deviation and, most importantly, the ‘tail risk’. A simple way to achieve low correlation with an equity index and positive returns is to assume massive tail risk.

  4. Barry,

    Frankly, those charts are no more misleading than similar charts created with the S&P 500. Moreover, they do represent the years of large losses in comparison to equity indices (2009, for example). While there may be some who try to only present positive returns in managed futures, we do not fall into that camp. Not only do the regulatory bodies in this industry require balanced discussions of loss and profit, but we believe full disclosure on individual programs is key to making informed decisions about the investments that are right for you, which is why you’ll often find us posting about programs in drawdown (Clarke Capital Worldwide is a recent example). Moreover, there are some schools of thought which suggest that investing in a program while it’s in drawdown may be beneficial [past performance is not necessarily indicative of future results].

    And that goes back to our initial point- if you’re concerned about indices, invest in a program instead- a point on which we happen to agree with one another. And of course, correlation is not the only consideration when determining whether investment in a specific program is right for you. We’ve written extensively on the subject in the past. Check out the following newsletters for more information, and thanks again for your comments. If you have any further questions, don’t hesitate to contact me at lnelson@attaincapital.com.

    What Managed Futures Success Looks Like (Hint: it includes drawdowns) http://www.attaincapital.com/alternative-investment-education/managed-futures-newsletter/investment-research-analysis/423

    How the Pros Manage Risk (It’s different with different strategies)
    http://www.attaincapital.com/alternative-investment-education/managed-futures-newsletter/investment-trading-education/424

    Expected v. Realized Returns in Managed Futures
    http://www.attaincapital.com/alternative-investment-education/managed-futures-newsletter/investment-research-analysis/419

    Managed Futures the Contrarian Way (Investing in drawdowns)
    http://www.attaincapital.com/alternative-investment-education/managed-futures-newsletter/investment-research-analysis/331

  5. I was a commodities broker for 5 years. I have yet to see a client make money in managed futures over a period of more than a few months.

    The commissions charged create a barrier that is impossible to overcome over time. Some programs require returns upward of 30% per year just to break-even. No investor has been able to successfully produce 30% plus returns over a period of a decade or more.

    A VERY clear point on why managed futures should be regulated more strictly is that they always choose to compare them to hedge funds. Hedge funds are only available to “Qualified Investors,” (with a few exceptions), managed futures are open to anyone. Unscrupulous brokers are encouraging people to put 100% of their retirement money into managed futures by showing the CME/ Barclay (how they don’t get sued over this name is beyond me)/ Attain/ Autumn Gold charts. They then sell them that they need to get into managed futures and push them into programs that aren’t even listed. Not all managed futures are scams, but the majority pitched to retail investors ARE!

  6. Where were you registered, and what CTAs were you recommending? The only explanation we can think of is the problem lies in the quality of the programs you were recommending.

    The most junior brokers in our office have been commodities brokers for at least twice as long, and have commonly seen clients make money in managed futures over periods much longer than a few months [past performance is not necessarily indicative of future results]. Sure, there aren’t many which will make money in consecutive months for more than a few months. There are ups and downs, but our experience is 180 degrees opposite of what you are describing.

    Take Clarke Capital Mgmt., a CTA with programs available to the ‘retail investor’ at minimums of just $50K. Their Global Basic program does 700 round turns per million over a year (which works out to 35 round turns per year for an account invested with $50k). At a round turn commission rate of $10 per trade, that represents 0.70% in commissions. If they do triple the volume, it is still only 2% of the investment. Or Rosetta Capital, another available at $50K, which is more active at about 100 round turns per year for a $50K account and a higher commission of $25 per trade. Their commission break even is just 5%; much lower than the 30% number put out by you. And – all registered CTAs are required to report their performance NET of all fees, including commissions; so we’re not sure how a CTA which reports their performance AFTER the affect of commissions could be a scam.

    Finally, we don’t recommend investors put 100% of their money into any one investment category. In fact, we have written articles on mirroring Harvard’s ‘retirement’ approach (http://www.attaincapital.com/alternative-investment-education/managed-futures-newsletter/investment_research_analysis/399), and articles tackling the issue of what percentage of overall assets an investor should consider for managed futures using the base ‘efficient frontier’ as well as several other takes on the efficient frontier (http://www.attaincapital.com/alternative-investment-education/managed-futures-newsletter/investment-research-analysis/407)

    Thanks for commenting, and if you have any further questions, please don’t hesitate to reach out!

  7. This is a question I have posed to other companies like this one and have never gotten a response.

    If I invest $100,000 in managed futures with this company can they guarantee me that I will get a better rate of return (after taxes and fees) every single year than if I simply put $45,000 in something like Vanguard Total Stock Market Index Fund, $45,000 in Vanguard Total International and $10,000 in the Vanguard Total Bond Markeyt Index fund?

    All I would like is a simple yes or no answer.

  8. No

    For one, regulations prohibit us (or anyone else) from guaranteeing any returns. But more importantly, it is a fool’s errand to believe any investment will outperform any other investment “every single year”. Anyone who would make such a guarantee about ANY investment product is not someone we would trust.

    Further, what does outperform mean? Better returns? Less volatility? Not everyone’s investment objectives and risk tolerance are the same, and no investment we know of (other than a Ponzi scheme) can promise to outperform the market every single year.

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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.