The Efficient Frontier Part 2

Contrary to popular belief, The Efficient Frontier isn’t our attempt to write about Star Trek (we can only dream); it’s actually an investment/asset allocation concept put forth by those who believe in Modern Portfolio Theory. If you have no idea what we’re talking about, we covered the concept in depth last year which you can find here, and back in 2010, here. For those wondering how the curve has changed, let’s take a look.

The data from last year’s Efficient Frontier (Jan ’94- Dec ’13) is the purple line and this year’s (Jan. ’94 – Dec ‘ 14) is the blue line:

Updated Efficient Frontier

(Disclaimer: Past performance is not necessarily indicative of future results)
Data Stocks = S&P 500, Bonds = S&P/Citigroup International Treasury Bond Index EX-U.S Index,
Managed Futures = Dow Jones Credit Suisse Managed Futures Index

All around, last year’s returns moved the Efficient Frontier up and to the left, meaning, all portfolio’s increased returns while eliminating volatility (a win-win for everyone).  This year’s returns also lifted the (36/24/40) portfolio from 6.44% to 6.68%, while actually slightly decreasing volatility by 0.02%, proving once again to be the most optimum portfolio mix  (highest return with lowest volatility) over multiple investment environments in the past {past performance is not necessarily indicative of future results}.

The comparison of these two curves illustrate a unique situation in which Managed Futures was able to increase its returns without increasing its volatility. Some of that may have to do with the lackluster performance the years prior to 2014. Meaning, Managed Futures returns might have caught up to its volatility {past performance is not necessarily indicative of future results}. Meanwhile, the traditional 60/40 portfolio all but stayed the same.

We realize that tacking on a year of returns only offers a small lens of how each portfolio performs over time (even if this is looking at data over the past 20 years). Before the current never ending bull run that we’re now experiencing, the Managed Futures diversified portfolio continued to offer the most optimum portfolio mix. Additionally, a 100% allocation to Managed Futures used to offer the highest return with the highest volatility, while a simple stocks and bonds portfolio only offered the lowest return with medium volatility. You can see that chart posted by CME back in 2008, here {past performance is not necessarily indicative of future results}.

Finally, for the drawbacks of the efficient frontier chart. It’s as simple as risk doesn’t necessarily translate to just volatility. It’s the same issue that most have with the Sharpe Ratio, and doesn’t consider downside volatility and drawdown to name two…). Meaning, these types of charts and ratios treat volatility as a bad thing, when low volatility can be not so smart.

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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.