Sorry, Barry – Commodities Ain’t Managed Futures

We love Barry Ritholtz’s site The Big Picture. It’s one of our favorite finance blogs out there, and we recommend it to anyone looking for good information and perspective on the market, despite the fact that he rarely discusses managed futures…

But maybe he doesn’t discuss managed futures because he doesn’t completely understand what they are. Case in point – a recent post of his literally refers to managed futures and commodities as a single entity (emphasis ours):

No fools they, the overpaid consultants happily complied, and the next thing we know, these Whiffenpoof Wannabes are up to their eyeballs in private equity, hedge funds, structured products, real estate, and commodities/managed futures

One of the few that is not are the Commodities/Managed futures bucket…

Granted, these snippets are taken out of context, but reading the piece it’s pretty apparent that Mr. Ritholtz is treating these two as though they’re one and the same. To be clear, managed futures is NOT commodities. Managed futures does trade futures markets – including, but not limited to, commodity futures (don’t forget about the fact that interest rate and index products are traded on the futures exchanges, too).

But the kind of commodities investment he is referring to is what we call long-only commodity exposure – in other words, just going long commodities and hoping the price goes up… and managed futures despises that model. Managed futures is about going long and short commodity markets, timing entries and exits, and rotating between sectors – not just “buy, hold and hope.”

In fact, that’s pretty similar to what Mr. Ritholtz himself has advocated in terms of stock investing – it’s not just buying and holding there, either. If this were on the SAT test, it would look like this:

Or, if you prefer a more statistical look – the two show little to no correlation to one another over the last 1, 3, 5, and 10 years:

Correlation Between Barclay CTA Index and CRB Commodity Index

1 Year

-0.178

3 Year

0.277

5 Year

0.290

10 Year

0.346

Finally – the AUM of managed futures is not seeing the “great rotation” he’s referring to. It is up $71 billion since 2008, and only down $7 billion from the peak in 2011 as of the end of 2012:

(AUM figures via BarclayHedge and excluding Bridgewater, since we don’t really think they count as managed futures)

The rotation he’s talking about – investors increasingly giving up on long-only commodity investments – is real, and we talked about it just last week. But to say that this is somehow a criticism of managed futures is to completely miss what our investment vehicle is all about.

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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.