The Overall Buzz about Managed Futures from The Top Managers Themselves

Kudos to HFR and CTA Intelligence Magazine for putting on a different event in Westchester Mon/Tues… if nothing else, they know how to pick a hotel – the Ritz was as ritzy as you would expect.

But this wasn’t the usual “promise” of matching up managers with potential investors, which more often than not fails to materialize (on the investor front…the managers always show up). This event was more of a brainstorming session on how to raise assets rather than a place to find assets… as well as an opportunity for small and midsize CTAs to mingle and question billion dollar managers, pension consultants, and multifamily office reps on how to crack into their slice of high society.

“How do I get you to look at my program?” was an often asked question, as well as specifics on how investors are viewing the managed futures space right now.

And while we were asked not to share the names of those who made certain comments and remarks (so as to foster a more open dialogue), CTA Intelligence did give us the green light to share some of what was said and discussed in an anonymous fashion.

Without further ado – items overheard at the CTA Leaders Summit:

  • The current environment for managed futures reminded one participant of a Chicago CTA conference in 1988 which was dubbed “the wake by the lake” because of the environment surrounding managed futures and a feeling that trend following didn’t work anymore (sound familiar?).
  • to a man (and woman), the feeling was that it is a very tough environment for raising money for managed futures right now….even for the managers who are doing quite well, as they get lumped in with the asset class as a whole.
  • Managed futures investors have become more sophisticated in past 10 years, moving from performance chasers looking for 40% years to asset allocators putting a portion of total portfolio towards managed futures. Canadian pensions are particularly up to speed on managed futures and “get it”, although they are increasingly bringing it “in house”.
  • Having said that… Family office and pension folks made it clear that performance still gets you in the door, and that even those big money folks are apt to want to do more of what’s working (equities right now) and less of what’s not (managed futures). They are a lot more like your average investor than you would think…
  • The amount of money allocated to alternatives by the “big money” is highly variable but in the range of 10% to 40%, with a fifth or so of that dedicated to managed futures.
  • Out of 90 approved hedge fund managers (including managed futures) and one big pension consultant, only 2 are under $1 billion…highlighting how the big just keep getting bigger. When pressed on how these investors reconcile the often lower performance profile of large managers against mid-size managers, the response was essentially that they are willing to pay a “safety” premium in a sort of “nobody ever got fired buying IBM” sort of way.

On to the market forecast looking ahead, which was all over the board as could be expected. Some of the forecasts overheard:

  • Stability breeds instability
  • discretionary macro will be a leader in 2014
  • with rates where they are now, we’re looking at bonds as a risk asset
  • equities are fairly priced right now, credit is fairly priced right now
  • a tail event is coming in markets other than equities

Elsewhere, an interesting panel talked about the explosion in volatility trading via VIX futures and options, and how volatility is becoming sort of its own asset class, and managers dedicated to the space are starting to pop up. An attendee had this to say about investors’ volatility appetite: “Since 09 – the environment has changed, moved from How do I buy volatility… to How do I manage volatility…. To How do I get yield from short volatility.”

Finally, there was talk in between session debates about the newest threat/opportunity to CTAs, low cost beta replication products, which purport to provide managed futures – like returns with a cost of under 1% versus the usual 2% and 20%. The best argument against these was that they are designed to be average – to track the index… While a manager is designed to beat the pants off the index, although not all do, for sure.

P.S – The best part of all was the late night story of a cosmetic salesman turned LIFFE futures pit trader who used ever more ingenious ways to do arbitrage between Chicago and London bond prices (including hotwired calculators and hidden earpieces), but we’ll save that for another day…

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