3 Things To Consider Before Hitting The Sell Button

After a rough March for managed futures, and more of the same thus far in April, we’re likely to see some nervous investors pulling some or all of their managed futures exposure next month to alleviate some short term pain.  This is usually a bad idea, especially for systematic strategies which tend to cycle in and out of performance based on market consolidation, volatility expansion/contraction, and so forth. Meaning, the conditions causing poor performance can create the environment needed for good performance.  We were reminded of this today via this tweet from Jim O’Shaughnessy:

This points you to an excellent Reformed Broker post containing this nugget concerning pension fund’s hiring and firing of managers – where the fired managers (the ones underperforming) go on to out perform the managers they were replaced with.

Chart 5. clearly illustrates the impact of this phenomenon in the pension space. The grey bars represent the average annualized performance of terminated managers in the three years prior to, and three years subsequent to, their termination. The white bars represent the performance of replacement managers in the same years. Clearly institutions are hiring managers with exceptional historical track records over trailing 3 year periods, and firing managers with poor track records. The joke is on the institutions, however, since on average the fired managers go on to outperform the hired managers over the subsequent 1, 2, and 3 year periods!

Hired Fired Firms

This is a sort of negative compounding effect going on here, where in the name of improving performance, investors actually negatively impact their performance. Pension funds, with their consultants and employees whose job it is to monitor things and make changes in the name of better performance are particularly at risk of the change to improve fallacy, but they are by no means alone. Everyday investors do the same thing in all sorts of investments, usually getting out when they should be getting in on the investor emotional cycle.

We did the math on this a while back, calculating the performance of a basket of managed futures programs at each level along the emotional investing cycle, finding that indeed, the point of greatest return above the average is at the point of highest emotional distress – capitulation and despondency – mapping to 18 and 21 month lows.

Emotions Investment Cycle

Performance of Emotion Investment CycleInfo Courtesy: Performance on the Market Cycles 

We’ll sum it up with this awesome graphic from the behavior gap:

The Behavior Gap Investing CycleChart Courtesy: Behavior Gap 

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, 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, 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.