Those who “run money” for a living (do people still use that term?) probably get the majority of their gray hairs in the final few days of each month, and in December of each year; waiting to see if the last day of the month or last month of the year will push their performance track record into the black or red for that month. A quick up tick in the Yen, or few basis point move in the 10 yr note over the last few days of the year can mean the difference between posting a positive number or a negative annual number. Now, we can all realize that it is completely arbitrary where the markets move any one day or week – meaning a shift of 0.50% to 2.50% over such a period probably shouldn’t be the basis for checking whether a manager was successful or not that year.
But the human brain does some really weird stuff around the end of the year. Those small insignificant moves which push returns just this side or that of even quickly translate into all sorts of investor thoughts such as “they’ve lost money in two of the past three years”, or “they haven’t had a losing year in 6 years”, and so on. And those thoughts often lead to real decisions on whether to allocate to a manager or stop an investment.
So do managers in control of billions of dollar really pin their hopes and dreams on how performance stands at the end of an arbitrary date on the calendar… You bet. They hate it, to be sure; and are only too willing to talk of rolling returns, averages, and the utter nonsense which is the annual return – but the fact of the matter is most investors still hone in on the annual return above all else. We’ve all done it, asking “how did they do during 2008?”, and “they really struggled in June,” and so on.
Add in the annual reports of the top hedge funds which make the rounds this time of year and this type of behavior is reinforced over and over. You rarely see mention of how the top guy did in December of the prior year, or how they’ve started out in 2014… it’s all about the Jan 1 to Dec 31 period.
Which got us to thinking… just how silly is this devotion to the calendar? To answer that – we tweaked the daily returns of the Newedge CTA Index a little bit (and by a little bit, we mean little). We “moved” the year forward by 1 day, 3 days, and 5 days – considering the year Jan 3 to Jan 2 of 2014 for the “Plus 1 Day”, and so on. The results were surprising – with the annual performance different by over 2% between the best performance (the actual calendar year) and the plus 3 day adjusted year. You can also see rather large differences in the monthly numbers – with the ‘Plus 1 Day’ year only having 4 losing months versus 5 for the calendar year.
(Disclaimer: Past performance is not necessarily indicative of future results)
Data Source: Newedge
So is it silly? Yes… Does it make no sense? You bet… Do investors cling to those monthly and annual numbers like the directions on a treasure map to El Dorado – definitely. So investors – cut your managers a break if they are down 5 months in a row or posted a slightly down year – it could just as easily have been 3 out of 5 losing months or a slightly up year with the dates shifted slightly. The real information is in the overall picture. It’s in the averages and the risk adjusted ratios and the rolling returns and the rest, not how the returns fell on an arbitrary end to a month. And managers… don’t hold your breath waiting for investors to stop giving overdue relevance to the calendar year returns – it’s how their brains work.