We’re constantly reading what other people write about managed futures. It’s been interesting to sift through all the different theories being floated about why managed futures is where it is today, but none have made us laugh quite as hard as the fund buster argument. Price Action Lab explained it this way:
The fundbusters team includes your familiar quant blogger, your local college professor and everyone else who can identify an edge and publish the results in a journal or in the blogosphere. As fundbusters keep on getting satisfaction from publishing edges rather than from using them, the rate of failure of funds of all types will increase and managers will be driven towards higher complexity edges. […]
I am not going to mention specific papers but you can find hundreds of them written by physics or engineering professors. You can even find more edges published in the blogosphere. I am not going to try to analyze the peculiar fact that a lot of people find satisfaction in publishing edges instead of using them to make money. A person I know insists that this is typical behavior of losers or insecure individuals in general. I do not know if I agree with that. I think there may be many different reasons as to why people elect to discover and publish trading edges. One of the simplest reasons is that the academic community has run out of new ideas in the traditional fields and has just discovered a new field to generate papers from. Some people need the papers bad to get tenure.
The fact is that in the last few years and after the trend in publishing trading edges has started, a lot of funds, especially managed futures funds, are having problems generating absolute returns.
Seriously? That’s why managed futures has struggled this year? Because too many edges have been published? Sounds like grasping at straws to us. For starters, we read all of these blogs and academic papers… but we don’t recall being wowed by a steady stream of “edges” scrolling across our screens. Additionally, the managed futures industry is built on transparency; with investors able to see open positions, entries and exits on a daily basis. Managers may not hand investors the explicit code they’ve programmed to guide their trading, but they’ll get pretty close. We reached out to Alejandro Diego of Quantum Leap Capital, and he put it this way:
With regards to our edge, we are open about the general philosophy of our trading methodology but try not to disclose the “secret sauce.”
The answer is there is no way of completely shielding your trading strategy from outside observers, especially with managed accounts where your trades are out there for the world to see. To me, thats the sacrifice we need to make as managers in this new world of transparency and investor skittishness. As for returns, I am not so sure you can link low returns to edge infiltration. I think it has to do more with current market dynamics.
We have to agree with him. And it makes us think back to the baseball analogy we’ve used in the past. Publishing edges is like giving a guy on the street Mickey Mantle’s bat. Just because you have the same tool in your hand that he used to belt home runs doesn’t mean you will be able to get it out of the infield. It’s not the tool; it’s how you use it. The building blocks of trend following, for example, have been public and written about by academia for 2 decades or more. There are a plethora of easily accessible tutorials on how to bracket markets and capture trends. And even forming an opinion on when to get out, which markets to include in a portfolio, how much to risk per trade, and what filters to apply can be gleaned from reading enough.
But these tools don’t make money on their own. They need a trend in order to work. Just like a batter can’t hit a home run if he doesn’t get pitched to, an investor cannot easily duplicate the results of a managed futures program by doing a little light reading.
We’ll be breaking down why certain strategies performed the way they did in 2012, and what to expect in 2013, in the weeks to come, but to blame it on academia “fundbusters”? Utter nonsense.