Iceman: You two really are cowboys.
Maverick: What’s your problem, Kazanski?
Iceman: You’re everyone’s problem. That’s because every time you go up in the air, you’re unsafe. I don’t like you because you’re dangerous.
Maverick: That’s right! Ice… man. I am dangerous.
It’s been an incredible 4 years for the stock market, there’s no two ways about it. Since the stock market (call sign = Maverick) bottomed in March of 2009, the Dow is up nearly 121%, while managed futures (call sign = Iceman) as measured by the Newedge CTA index is down -1.4%. A beat down by any measure – and one of the reasons you don’t hear us or anyone else in the managed futures space recommending 100% allocation to managed futures. It can pay to have some stock exposure (although we prefer to get it indirectly via equity-like hedge funds).
But for all the hubbub about the Dow being at a new all time high, and the talk about how bad things have been for managed futures, the following chart deserves some attention. You see, the Dow has had an impressive rally, no doubt. But after rallying 120% since the bottom, it still trails the Newedge CTA Index by 15% since that former high. What?
Disclaimer: past performance is not necessarily indicative of future results.
Part of this is simple math. A loss of 25% requires a gain of 33% to get back to even. A 50% loss needs a gain of 100%; and a 75% loss, a gain of 300%. If you avoid the large loss (or even make money during bad periods) you don’t need the triple digit gains to get back to even. Managed futures have been flat, but they could afford to be after their great performance in 2007 and 2008 and lack of big losses during their bad periods.
It’s about being safe, and controlling your losses.
Which brings us back to Maverick and Ice Man. We were reminded of the 80’s classic movie Top Gun when looking at this chart, because the blue line crashed and burned then came storming back just like any good Hollywood ending. And the line about Maverick being unsafe and dangerous couldn’t be more spot on when you imagine them talking about Maverick the stock market instead of Maverick the pilot. Change a few words in that quote and you have the makings of any bear’s core philosophy.
[It’s] everyone’s problem. That’s because every time [it] go[es] up in the air, [it’s] unsafe. I don’t like [it] because [its’] dangerous.
So, the stock market is Maverick, crashing and burning, losing a co-pilot, breaking up with the girl, then gaining it all back and saving the world. That works for some people. Managed Futures is Iceman – not doing anything flashy, but not likely to crash and burn at the first sign of trouble either. And for those who don’t know or don’t remember the ending – while Maverick may have been the “hero,” Ice Man was there in the end doing a pretty good job, too.
Crashing and burning, then coming back strong may make a good Hollywood movie; but is it really how you want your portfolio to act? We think it’s better to fly your portfolio fighter jet like Ice Man.
PS – the Nasdaq is still down -35% below its all time high 13 years ago. The Nikkei is down -68% from its high 23 yrs ago. These things don’t always snap back quickly like the Dow has.