Our weekly newsletter is out, and we’re taking a closer look at the various managed futures indices. When we begin to explain an asset class as complex as managed futures to investors, the first place many turn is the world of managed futures indices. The whole idea behind these indices – and really ANY financial index – is to provide a snapshot of an investment world. It gives you a glimpse of performance, and provides a starting point for further investigation into the allocation opportunities.
For alternatives such as hedge funds and managed futures, there aren’t stock tickers like AAPL that you can punch into your computer, and you aren’t going to hear “managed futures was up 2% today” on the nightly news. With individual program data more difficult to obtain than it is in the stock world, the indices perhaps take on an even greater role in generalizing the asset class’s performance.
Problem is, there’s a long list of academic papers calling into question the validity of indices, essentially saying they upwardly bias the results in one way or another. Then there’s a whole different slew that attack the databases used to create indices, and get cited as evidence against the indices. Should that really influence your decisions or reliance on indexes to provide a snapshot of the industry?
It should be noted that there is no such thing as a PERFECT financial index. Whether you’re looking at bonds, stocks, real estate, hedge funds or managed futures, their respective indices will never be able to give you an adequate view of the entire universe of investment possibilities. Because they only represent a fragment of the selections you as an investor can make, they will invariably suffer from a variety of biases. These biases can vary based on how the components of the index are selected, how the index is maintained, and how data for performance is collected. In some cases, bias can be a good thing. In others, bias can taint the integrity of the information you’re consuming. The key is knowing the extent of the bias, and what impact it has on the data.
This hasn’t stopped critics from attacking managed futures at full speed in the past, nor the investor questions from coming in as a result. Are my allocations going to underperform by 3 to 5% because of this bias? Should I even bother looking? We have long promised to take a look at the reported bias is the managed futures indices, and the arguments made against them, and after poring over the literature – found the time has come for just such a defense. But as we began to craft the arguments, we found the word count inching higher and higher. Rather than deliver you a small Russian novel, we’re splitting this newsletter into two parts, and this is the first.