How much of a Drawdown are You Willing to Endure?

It’s a question we think most investors don’t really think about until their portfolio is down double digits from the peak equity. The rhetorical question that gets asked even less, is how long are you willing to sit in a drawdown before you get out? This doesn’t mean that the investment strategy is doing poorly, it just hasn’t hit new equity highs in a while. The Financial Times sought out to find that answer, and it turns drawdown tolerance can be tied to age.

According to research from Legg Mason, the US fund house, which polled more than 5,000 wealthy individual investors across 19 countries, fewer than one-fifth of generation Y respondents said they would be prepared to hold an underperforming fund for more than a year before they dumped it.

In contrast, almost three times as many investors over the age of 40 said they would stick with a poorly performing fund, finds Legg Mason.

We aren’t sure what technically qualifies as “Gen Y” but it seems to be the earlier portion of Millennials (immediately after Gen X, born in 1980-1990). Maybe they’re impatient about performance because they grew up with companies constantly selling them immediacy and convenience such as Go-Gurt, or maybe it’s because they’ve witnessed two crashes in the stock market in their lifetime.

Regardless, these findings are intriguing given our post last week showing some of the turmoil currently going on in the managed futures space. We are realizing that much of the billions that have flowed into managed futures mutual funds over the past few years may not be used to seeing this type of drawdown. They may be thinking the worst, being new to these type of investments, and see this as the start of an MLP-like losing streak where these funds could go from down -5% to -25% to -75%.

Well, let us tell you – this isn’t the wild west world of MLPs tied to a one-way bet on volatile commodity prices. These are actively managed investment models dedicated to controlling risk across varying market environments. That doesn’t mean they’ll make money every day of every month. They’ll lose money some days. They’ll sometimes lose money many days in a row.  But a look at the statistics shows these losing periods for managed futures are more like Whiskers the house cat than the Big Cat drawdowns seen in stocks, gold, and commodities.

Worst Losing Period
Source: Gold data from USAgold.com; S&P Depression data from MorningStar;
S&P 500 (post depr.) data from Yahoo Finance;
Real Estate data from Case Shiller U.S. National Price Home Index;
Managed Futures data from NewedgeBarclayhedge CTA Index, and Dow Jones Credit Suisse;
Bonds data from Fidelity Investment Grade Bond

And it’s not just the magnitude of the drop, managed futures have a penchant for recovering the drop (perhaps because it’s smaller) a lot quicker than other asset classes as well.

Max Length of Drawdown

If you like pictures better than graphs – here’s the summary:

Other Asset Classes “Crash”

Car Crash Drawdown

Managed Futures “Crash”

Managed Futures Drawdown

To the majority of Gen Y investors saying they wouldn’t stick around after a year if you find an investments strategy that less than a 12 month max drawdown length, we’d love to hear about it. After that, we’d love to hear about their annual return expectations.

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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.