It seems our recent newsletter covering Wisdom Tree’s Managed Futures ETF (WDTI) and Rydex’s Managed Futures Fund (RYMFX) has caused a bit of controversy in the blogosphere, with Victor Sperandeo, chief executive of Alpha Financial Technologies LLC, posting a response to our critique. We are happy the debate is now out in the open, and respectfully submit the following counterpoints.
Mr. Sperandeo’s main points of rebuttal are:
1. The Diversified Trends Indicator™ is a Managed Futures type Strategy
We agree, the DTI™ is a managed futures strategy – we never said it wasn’t. The DTI™ looks very similar to many long term trend following type managed futures programs, with the main exceptions we see being a smaller universe of markets followed and artificial constraint against short energy positions.
Our point is that it is only a SINGLE strategy in an asset class containing thousands if not tens of thousands of strategies. Our problem with the Rydex and Wisdom Tree products is that they imply, via their name, that they give access to the Managed Futures asset class and/or track an index of managed futures PROGRAMS. If they were named “Managed Futures Replication Strategy” funds or something similar, we would have no issues.
But as they stand, it is similar to coming out with a product named “US Stock Market ETF” which doesn’t track multiple companies and facets of the US stock market, but instead only trades a single stock like IBM. Doesn’t that seem a little off base?
2. The Wisdom Tree Managed Futures ETF and Rydex Managed Futures Fund do not track the same index.
We stand corrected here, although returns since inception of the two products show very little deviation.
3. The DTI™ does not significantly underperform the Newedge CTA Index, having outperformed the Index since 2004.
I believe we laid out in our piece the performance of the DTI™ versus the Newedge CTA Index both from 2004 to 2007, AND from 2007 onwards. We showed the outperformance from 2004 to 2007 quite clearly (indeed saying that was likely the reason Rydex used it as their “index”), so not sure about the charge of ‘cherry picking’.
And two important points to consider with the numbers in Mr. Sperandeo’s rebuttal. One, he uses the DTI™ Total Return numbers in his rebuttal, which include T-Bill interest. Fair enough, considering most managed futures funds receive T-Bill interest, but worth knowing none the less. Two, the DTI™ total return numbers do not include any cost adjustment. Rydex charges 2% per year to follow it – surely that number must be included in a comparison of the two, as the Newedge CTA index is calculated with the component programs AFTER FEE returns.
If we look at the full track record (Jan 2004 through Feb 2011) of the DTI™, DTI™ Total Return, and DTI™ Total Return less a 2% annual fee versus the Newedge CTA index, we come up with the following numbers, which can speak for themselves.
[Past Performance is Not Necessarily Indicative of Future Results]
Source: DTI™ (aftllc.com), Newedge (Newedge.com)
At the end of the day, the performance numbers of the investment products, not the underlying indicator, will be the ultimate judge as to whether the Rydex and Wisdom Tree products successfully track their namesake “Managed Futures”. We don’t believe they will see long term success beating the managed futures indices (or if they are even trying to beat those benchmarks) because they track only a single strategy.
And to make our argument as to why – we’ll quote Mr. Sperandeo himself:
“admittedly, a diversified portfolio of 20 or more trading programs with 100’s of strategies will often generate more favorable statistics than a single strategy, from the diversification standpoint alone.
… Furthermore, the 20 (current) funds comprising the NewEdge CTA Index are not all pure trend-following strategies. This gives the Newedge CTA Index a distinct advantage during the 2009 and early 2010 periods, where a lack of sustained trends across several key markets created a difficult environment for many trend-following strategies and indexes.”
We couldn’t have said it better ourselves. If you want TRUE managed futures exposure, in our opinion, you need a portfolio of different trading programs diversified across various trading strategies which pure trend following is but just one component.
Now we will readily admit that does take more than $5,000, and can take well into the millions – so these products may indeed be the closest a small investor can get to managed futures. But even if that is the best they can get, should they still be named as they are?