So far this year, two stocks have displayed an impressive level of tenacity (the bad kind) – no matter how far down they go… they just keep going down. We’re talking, of course, about two of the biggest tech-IPO flops in recent memory: Zynga and Groupon. Both of these companies have endured declines of -80% or more in 2012, in less than seven months (Zynga from March to September, Groupon from February to August). Of course, we’d be remiss if we didn’t also mention Facebook, which is down about -50% in a scant 4.5 months.
Dropping -80% in seven months has to be tough on investors – and it tends to brings out the “1 in 100 years flood” type commentary, that such a thing rarely happens in the supposedly conservative world of stock investing; even though we’ve seen this exact drama unfold before in the days of the internet boom (Webvan, Pets.com, etc.).
But it got us wondering – how frequent are such death spirals in the world of managed futures? Specifically, we didn’t just want to know what CTAs had suffered similar drops over any time period… but which CTAs have lost that much in just seven months?
We looked at the rolling seven-month returns of 2092 CTAs in the BarclayHedge database with at least a seven-month track record going back to 1980. And considering that a program that lost -80% or more is not likely to be around any more – we made sure our data set included dead programs (or programs which stopped reporting to the database – usually because they shut down).
As it turns out, only a few of those 2000+ CTAs have experienced comparable seven-month stretches. In fact, just 15 programs (0.7% of the total) have fallen by more than -80% in any seven-month period, and only 33 (1.6% of the total) have fallen by more than -70% in such a short time. What’s more, most of those programs were relatively tiny. Of the 20 programs with the largest seven-month declines, only 4 had an AUM of $10 million or greater at the beginning of their decline, meaning most of these were the equivalent of penny stocks – not high profile programs the way that Groupon and Zynga were high profile IPOs. (Disclaimer: past performance is not necessarily indicative of future results).
Now, futures trading is complex, and presents the risk of substantial losses, but it’s worth remembering that investing always implies taking some kind of risk. If you’re invested in the bonds of a company or country that happens to default, it probably won’t be much consolation to you that bonds tend to be safer than other investments. Same goes for being in a CTA that “blows up” (Dighton), or the stock of a blue chip company that files for bankruptcy (Enron).
It’s dangerous waters out there, and investors (especially those betting on the dream of a hot IPO) need to remember there is real risk on the downside – regardless of how “safe” or “risky” your investments are supposed to be.