Diminishing Market Diversification Resulting in Diminishing Returns?

In managed futures, people like to tout exposure to commodities. Now, at least one firm is betting that excluding all commodities could be the recipe for success. InvestmentNews reports:

By leaving commodities out of the SSgA SSARIS Managed Futures fund altogether, the fund should have even lower volatility, according to SSgA. In a prospectus filed with the Securities and Exchange Commission last Friday, the company also said it would be targeting futures contracts with low daily standard deviation. Marie McGehee, a spokeswoman for SSgA, declined to comment on the filing.

The downside of leaving out commodities could be lower returns. While commodities tend to have the highest volatility, they’re also a potential source of big returns for managed-futures funds, which basically are trend-following strategies.

It was that second paragraph that stuck out to us most. See, as an Introducing Broker that works with a wide variety of CTAs in the emerging space, we’ve been looking at the distinction between programs with hefty commodity exposure, and those that tend to stick to financials of some form. As it turns out, the idea of biasing exposure away from commodities is nothing new. In fact, this strategy has been embraced by some of the largest players in the industry. Take Winton, for instance:

They’re already gravitating away from the commodities that gave managed futures their name. In some ways, one might interpret this to mean that the “new” strategy isn’t that new at all, and may just come close to replicating titan performance. But even then… is that the kind of performance managed futures investors really want today? We took a look at the average negative and positive monthly returns for some of the most well-known CTAs out there, and here is what we found:

(Disclaimer: past performance is not necessarily indicative of future results.)

These guys may have the big names, but they certainly don’t have the same kind of big performance they made their names with anymore. For a mutual fund strategy, which, as we’ve written about in the past, will frequently cannibalize their own performance with excessive fees, such diminishing returns, in our opinion, are likely less than appealing. But, hey – best of luck.


  1. Hello again! Interesting report. I just hope that these guys did not use some genetic programming engine to curve-fit a few indicators to past performance because they will be up for surprises. As a matter of fact, I just saw your post right after I published a new article in my blog that argues that this type of funds are an easy prey for various market predators. (I will not provide another link to my blog here but the title is “Systematic Stock Index Trend Followers Are An Easy Prey”). I wish them good luck but things do not look good for stock index trend-following funds.

    By the way, “low daily standard deviation” sounds too vague. I guess they will be calculating that over a certain period but do you guys know any of the details?

  2. Only details we have came from the original article, but vagueness is nothing new in many of the mutual fund trading descriptions. We’ll check out your post!

  3. Hello-

    Thaks for your reply. I had an article published in Seeking Alpha today on this subject, motivated by your post: http://t.co/ByprsbyC

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