Be Careful Predicting a Forecast

We’re only days away from April, and although it still feels a little winter-like in Chicago, planting season is upon us. Tomorrow, the USDA will release a crop report, forecasting how much Corn, Wheat, Soybeans, and so on will be planted in this fine country this time around.  And the analysts are already out with their predictions on the forecasts.  There’s a joke in there somewhere, ‘what do you call a prediction of a forecast…. wrong’. We’re not sure who these “analysts” are, but they’re predicting that the USDA will predict (you may have to read that twice) a larger planting season for one crop in particular… Soybeans.

“Analysts on average expect soybean acreage to rise 3% from last year to 85.9 million acres, while corn will fall 2% to 88.7 million acres, according to a survey by The Wall Street Journal.”

“Farmers are turning to soybeans for a few reasons: Prices have fallen less sharply than for corn, demand has been strong and producing the oilseeds costs less thanks to lower seed prices and less need for fertilizer.”

Farmers say the crop is better for business (at the moment), but there are downsides to these positions.

“But sowing more soybeans—used to make everything from animal feed to salad dressing—has its own downside. Many traders and investors are betting that further production increases will trigger steep declines in soybean futures, potentially pushing the $35 billion market to lows not seen since 2009.”

The question remains, that if more soybeans are in fact planted, could we see Soybean prices fall faster and deeper than what the markets experienced last year? Some analysts are predicting Soybeans to drop below $9 a bushel. Here’s the latest look at Soybeans by acres planted, front month contract prices, and net positions over the past 1.5 years.

Wall Street Journal Soybeans(Disclaimer: Past performance is not necessarily indicative of future results)

There’s also a little of a ‘chicken or the egg’ debate here, because what happens if the USDA does come out and forecast record breaking acres planted in Soybeans, forcing prices lower, which in turn causes farmer’s not to plant it, thereby invalidating the ‘forecast’.  Welcome to the exciting and often wrong world of predicting a forecast – we’ve touched before on how the USDA crop reports aren’t all that accurate (and here).  And in today’s age of twitter, live updates to your phone, and folks like this doing a Pro Farmer Midwest Crop Tour, the USDA has to come up with a better way to accurately report crop data.

Meanwhile, Alternatives folks (specifically those who ply their trade in such Agriculture markets) don’t care all that much if Soybeans drop to $5 a bushel. They just care that the move from $9 to $5 is consistent enough to lock in the downward trend. We’ll see what happens tomorrow.

Weekend Reads: Wealth Inequality

Wealth Inequality – (The Economist)

Bigger & Better Advisors – (Investment News)

How Different Sectors of the Market Perform Once the Fed Starts Hiking Rates – (Bloomberg)

How Chicago has used Financial Engineering to Paper over its Massive Budget Gap – (Medium)

Volatility Is Back… Embrace It! – (Wall St. Daily)

We Don’t Know How Often Pilots Commit Suicide – (FiveThirtyEight)

Managed futures can even help an oracle – (Futures Magazine)

March Madness Predictions – (FiveThirtyEight)

Alternative Links: AUM & Performance Chasing

CME:

CME Is Said to Mull Rule Change as Basel Pressure Hampers Banks – (CME Group)

As Silence Falls on Chicago Trading Pits, a Working-Class Portal Also Closes – (The New York Times)

CME says no decision yet on EU wheat contract launch – (Reuters)

AUM & Performance Chasing:

More Global Mandates, Fewer EM Mandates, and Other Changes – (All About Alpha)

Getting in at the High, Out at the Lows – (Attains Alternatives Blog)

Beware of this article: “Buyer Beware With Managed-Futures Funds“ – (MorningStar)

Liquid Alts:

Do Liquid Alts Justify Their Costs? – (Advisor Perspectives)

Short Selling Options:

Selling Volatility Offers Non-Correlated Returns – (Daily Alts)

Options Trading is for (Thanksgiving Turkeys) – (Attains Alternatives Blog)

Bitcoin:

Bitcoin: The Next Asset Frontier? – (TabbForum)

Blast From the Past:

Quant Who Shook the Financial World Tries More Humble Approach – (Bloomberg)

In at the Highs, Out at the Lows

Do you learn from your mistakes? Do your neighbors, colleagues, or the rest of society? It seems that the answer is usually no; and especially no when it comes to the toxic investment cycle of getting in at the highs and out at the lows. We see time after time that this dangerous cycle transcends asset classes, market environments, and Fed chairperson.  We’ve talked before about the dangers of the emotional investment cycle, and after getting the last of the 2014 data on asset flows – we can see Managed futures is the latest case study. Just take a look at the performance of Managed Futures when asset flows are overlaid onto the chart.

Managed Futures Performance vs asset flow(Disclaimer: Past performance is not necessarily indicative of future results)
Source: Barclayhedge CTA Index

People could not have been much more wrong, with outflows of -$63 Billion over the two years ending June 2014, right before managed futures went on to rip off average index gains of +12.32% in the next 6 months. Now granted, those folks who bailed for the exits were looking at being down over the preceding three year period. But it’s not like we’re talking the internet bubble burst. The indices we down about –4.09% over that same time span (July 12 – June 2014). And it’s not like someone didn’t cue Wilson Phillips and say we were at a generational low.

The more troubling sign is that the people didn’t just get in at the bottom – a lot of money got in at the top as well, having poured $44 Billion into managed futures following gains of $7.56% between Jul 2010 and April 2011. What does this mean for the rest of 2015, where money should be flowing into the asset class following an impressive year?  Only time will tell, but we’ve got a feeling this isn’t quite performance chasing at this point. Wait until managed futures puts in a good two to three year stretch – then you’ll see the hot money running for the asset class…. just in time to suffer through a down to flat period.

Meanwhile, those who’ve been invested in managed futures for 10 years or more must just sit back and laugh at the flows in and out, knowing what they know – that it is a mutli-year investment which rewards investors for patience. They know that managed futures is much different than a typical stock market investment. The stock market sees consistent gains interspersed with periods of sheer terror. Managed Futures, in contrast, is consistent frustration/boredom, interspersed with periods of elation when big market trends emerge.

PS –  How big is the Managed futures industry, really? This is something we get into now and again, and just this week MorningStar reported that investors have seen the light, putting $1.4 Billion in Managed Futures Mutual Funds in the first two months of 2015. Now, Mornigstar just tracks mutual funds… not the overall space including managed accounts and privately offered funds. For that, we turn to BarclayHedge, who’s been tracking managed futures assets for 20+ years, and come up with total assets under management by managed futures firms at  $316.8 Billion.

There’s just one little problem, those numbers include the world’s largest hedge fund ($220 Billion Bridgewater).  And they include Winton. Now, we agree that Winton should be included, even if David Harding dropped an ‘f bomb’ in the Financial Times claiming they’re not a Managed Futures firm, just weeks before winning the Managed Futures Pinnacle Award last year.

For those who might want to see what the industry is looking like without Winton & Bridgewater inflating the numbers, here’s our try and stripping them out. While that downward sloping curve may send some of you running for the hills, this is exactly the sort of dis-interest those looking to get out of the toxic ‘in at the highs, out at the lows’ cycle should welcome.

Asset Flows of Managed Futures ex bridgewater winton(Disclaimer: Past performance is not necessarily indicative of future results)
Source: Barclayhedge CTA Index

DISCLAIMER: The stats herein discuss the growth of assets under management both from new money invested and gains/losses on past money invested. It is not intended to portray performance of the asset class.

 

February’s Best By Performance

While one month’s performance is no way to judge an investment that has 3 to 5 year cycles, a glance at who’s doing well in the different environments month to month can be a useful data point at times. Here’s the top managed futures performers (by return only) for the month gone by:

Note: These programs are not necessarily recommended by Attain. For a list with much more thought behind it – check our semi-annual rankings (updated February 2015).

 (Disclaimer: past performance is not necessarily indicative of future results. Programs listed consist of those with at least a 3 year track record tracked by Attain Capital Management for investment by clients via managed accounts and do not represent all available programs in the managed futures universe.  The Max DD represents the worst drawdown of all time for the listed programs).

Managers and ProgramsFeb. RORMax DDMin. Invst.
Brandywine -- Symphony Preferred (QEP)10.76%-38.11%1,600,000
Pacific Capital Advisors -- Vanguard9.48%-11.39%100,000
Bayou City Capital (QEP)9.26%-80.35%100,000
Boston & Zechiel -- ACTS Aggressive 7.85%-62.40%100,000
LJM Partners -- Aggressive Program Writing (QEP)6.22%-63.83%500,000
Diamond Capital -- Enhanced S&P 6.11%-10.82%150,000
Goldman Management -- Stock Index Futures (QEP)5.17%-5.08%300,000
JKI Futures -- Etiron 2X Large Prop. 5.03%-37.27%1,000,000
Ramsey Quant Systems -- RQSI (QEP) 4.79%-31.66%5,000,000
ITB Capital Advisors -- Time Value Trading (QEP)4.00%-40.49%1,000,000

(Disclaimer: Past performance is not necessarily indicative of future results)