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.