Mythbusting Fundbusters

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.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.