SALT 2012, the SkyBridge Alternatives Conference, hit the ground running yesterday, with a full day of interesting speakers and engaging content. It’s a who’s who of alternatives, but by no means is everyone on the same page about what an alternative is and what level of investment there ought to be.
The undercurrent in every conversation, on stage and off, has been the never-ending drama in Europe. Whether it’s hedge fund managers discussing market dynamics, or wealth managers who are warily watching the horizon, there’s a great deal of anxiety in the community regarding what they view as an inevitable crisis. That’s where the true debate comes up – what shape will that crisis take?
The most interesting thing about it is that the tide of opinion in this group has turned, with more and more people believing that the Eurozone is dead or dying. Opinions on what the catalyst for a final break will be are all over the board, with many of the usual suspects (Greece, Spain, France, or even an angry Germany) being pointed to as the likely trouble starters.
So what happens if the Eurozone splits? As some at the conference have said, managed futures would probably benefit in such situations, as it could reopen so many currency trends that went away with the establishment of the Euro. Silver lining to what is otherwise a catastrophe? Only time will tell.
China has been another hot topic. As some of the panelists, like Phillip Falcone and Eric Sprott, alluded to yesterday, China has become sort of the great unknown when it comes to evaluating the global investing climate. Questions surround the validity of much of our data on the Chinese economy, which makes it difficult to weave China into complete analysis with any certainty.
Unfortunately, there has been another trend at SALT – not in conversation, but among the panelists. We understand the bulk of such panelists are hedge fund types (thus biased), and that we are likewise biased the other way being managed futures folks, but if there’s one trend we can’t get on board with, it’s a trend of making poorly informed claims about the managed futures asset class. Both the fund of fund panel and CIO insights panel yesterday set their sights on the asset class, expressing disdain for CTAs because they are too “black-box”, employ so much leverage, are confusing, and struggled last year.
Perhaps trying to fit the square peg managed futures asset class into the round hole strategy buckets is too confusing for some of these panelists, so let us, very succinctly, clarify a few things.
- Managed futures are no more “black box” than any other hedge fund. No manager worth their salt is going to tell you the exact inputs and parameters of their algorithms, and all managers are going to give you broad outlines of the strategy – not to mention specifics via the due diligence process. And it’s hard to be overly “black box’ in our opinion if your investors can see your trades on a daily basis. This sounds to us more of a problem of not understanding the performance drivers for managed futures (increasing volatility and extensions of trends), and confusing non correlation with negative correlation. I imagine the thought process getting to the idea of managed futures being too black box was something along the following lines: “I invested in managed futures because they are non correlated with stocks, and the stock market went down – and I lost money in the managed futures investment at the same time. What $#@!? These new fangled programs don’t work, and I sure don’t understand how they make money if they didn’t when stocks were down, they are too ‘black box.'”
- Managed futures do not employ leverage as hedge funds do. Managed futures managers do not borrow money using investor capital as collateral to make investments. Yes, managed futures do have built in leverage via their use of futures markets (where you can trade $100,000 worth of Crude Oil with just $7,000 = 14 to 1 leverage), BUT they generally all delever those built in leverage amounts by requiring minimum investments many times the amount of capital they technically need to put on a trade. The norm is about 12% margin to equity ratio, which means they are delivering the built in futures leverage by a factor of about 1 to 8. If they were fully using the built in futures leverage, their margin to equity ratio would be 100%
- Managed futures is only confusing if you make it that way. The bulk of the programs in the space are based on trend following, which means they mathematically identify trends and try to make money off of them. Basic. Simple. It’s just different from the stock picking world you’ve been used to. Most of this likely comes back to the example in #1, where the confusing part is understanding what drive managed futures performance.
- Managed futures is a long-term investment. Yes, managed futures struggled last year, but there’s a reason we encourage investors to allocate on a minimum timeframe of 3 years. Performance is traditionally cyclical in managed futures, and while past performance is no guarantee of the future, the fact of the matter is that one year is not enough to evaluate the asset class’ suitability within a portfolio. You didn’t stop investing in hedge funds after an ugly 2008, did you?
We’re hoping there’s some more enlightened conversation on the stage today regarding managed futures, and there are a few panels out there that show promise. In the meantime, be sure to follow along on Twitter as we cover the panels throughout the day!