Some Leap Year Fun

It’s not every year that has 366 days… it’s every fourth (except for years divisible by 100, excluding those divisible by 400). Even that system isn’t quite precise enough to keep our calendar on track, so we have leap seconds, too. (Watch out for that extra second on June 30th this year).

But do all of these calendar shenanigans have an effect on the market? One more tick of the second hand isn’t likely to change anything, but what about a whole extra 24 hours?

Well, probably not. For instance, the average daily gain for the S&P 500 on February 29th is 0.05%, compared to 0.03% for all days. Not much of a difference (in absolute terms) there.

What about Managed Futures? Here the numbers look a little odd:

Leap years vs non-leap years

Source: Dow Jones Credit Suisse Managed Futures Index. Disclaimer: Past performance is not necessarily indicative of future results.

Triple the returns for leap February compared to common February? What’s going on?

While this certainly looks interesting, it’s almost certainly a statistical fluke. Going back to ‘94 only gives us 4 leap years to look at (’96, ’00, ’04, ’08). One of those years (’08) happened to be one of the best years for Managed performance. More importantly, none of the other years happened to be losing years (the biggest losers being ’95, ’99, ’09, and ’11). As a result, the outlier year in ’08 is skewing the average up and disguising the fact that two non-leap years (’98 and ’02) had even better returns than ’08.

This brings up a valuable lesson that can’t be repeated often enough – correlation does not equal causation. And while we’re at it, don’t take every statistic you see at face value. Because not everything the produces an interesting result is necessarily meaningful.

Happy Leap Day!

Thoughts on the Nasdaq Breaking 3000

There’s something about round numbers that gets investors riled up. Witness: tons of news around today about the Nasdaq topping 3000.

We hate to rain on the parade, but that’s still nearly 42% below the all time high of 5132.52 it reached on 3/10/2000.

Don’t get us wrong, the up move of 137% from the lows in 2009 through now is impressive, and reaching its highest level in 11 years is great. Unfortunately, that still leaves us with the uncomfortable fact that those 11 years were all spent in drawdown. If you invested in December of 2000 and held on until today, your money went exactly nowhere for that 11 year stretch.

And what about those investors told to buy and hold at the highs who are still staring losses in the face?

Choosing your time frame can make a world of difference.

Impressive:

The rise of the Nasdaq.

Nasdaq Composite Index via Google Finance. Disclaimer: Past performance is not necessarily indicative of future results.

Depressing:

And the bigger picture

Nasdaq Composite Index via Google Finance. Disclaimer: Past performance is not necessarily indicative of future results.

Show me the Money!

If you haven’t seen Jerry Maguire, you should, but if you haven’t, there’s one exchange you’ve probably at least heard colloquially referenced at some point- a rather famous scene where agent Jerry Maguire is being goaded by client Tidwell into yelling, “Show me the money!”

Tidwell wants to see the dollar signs, and we don’t blame him- or the would-be managed futures investor who demands the same. In fact, those investors may be smarter than they realize. You see, we get so caught up in analyzing the compound ROR, max Drawdown, Sharpe ratios and the rest of it… we sometimes forget to keep our eye on the ball and ask one very simple question – how much actual money has this manager made for investors?

It is so ingrained in the investor psyche to look at percentage returns (YTD, compound ROR, past 3yrs, etc), that many of us forget to think that these investments are hoping to actually make real money for investors, not just post percentage numbers on a score board. But that shouldn’t matter… should it? The data tells us otherwise.

Click here to read the full piece.

In Search of the Educated Investor

It’s not often we agree with managed futures critics, but this time around, we’re making an exception. A recent piece in the Wall Street Journal told the story of a man who passed on the managed futures mutual fund MutualHedge Frontier Legends Fund. We’re not a huge fan of the managed futures mutual fund in general; we prefer the liquidity, transparency and lack of load and sales fees you can get from managed accounts. But our admiration of Rick has nothing to do with the Legends fund itself. No, for us, it was the why:

Rick is a 50-something investor from New Orleans, whose financial adviser has been pushing him to move some of his assets into a “managed futures” fund, saying it will smooth out results.

The sales pitch he’s getting for the MutualHedge Frontier Legends Fund amounts to “Managed futures held up well during the last financial crisis,” and “This is what sophisticated investors do.”

While both of those points are technically correct, Rick’s not that sophisticated, which is why getting into MutualHedge Frontier Legends (US:MHFAX)  would be the Stupid Investment of the Week.

Stupid Investment of the Week highlights the concerns and characteristics that make a security less than ideal for average investors. It’s written in the hope that showcasing one worrisome situation will make it easier to sidestep danger elsewhere. The column is not intended as an automatic sell signal, and in fact the investors who have slugged more than $825 million into Frontier Legends since it opened at the end of 2009 might be pretty happy they’re in it.

My hope is that the bulk of those investors don’t fall into the “average” category, if only because they should be getting solid explanations from the advisers who sell MutualHedge Frontier Legends. Rick, by comparison, wasn’t getting those kinds of answers, and that alone would make it hard for him to get comfortable with any managed-futures fund.

Did you catch the important lesson in there? It has nothing to do with the Legends fund, or mutual funds, or managed futures performance. For us, the most important takeaway was this:

My hope is that the bulk of those investors don’t fall into the “average” category, if only because they should be getting solid explanations

Replace the word generic term “average” with “uninformed,” and this article makes a lot of sense.

If you’re looking at a managed futures investment, and the bulk of the pitch you’re getting is related to 2008, you should absolutely be running in the other direction. First of all, past performance is not necessarily indicative of future results. To base an investment off of one sliver of asset class performance is ill-advised no matter what the label is. Second, if you’re working with someone who favors generic explanations over taking the time explain one of the more complicated investments on the market (no matter what wrapper it’s in), they’re doing you a disservice. There’s a chance they can’t  explain the nuances because they don’t understand the investment themselves. This goes back to our newsletter about using caution when selecting financial professionals to work with.

No one should invest in managed futures without becoming educated on the asset class. It’s why we dedicate the time we do to our blog, newsletter and so on. An educated investor has more realistic expectations, and can make decisions that are better suited for their investment goals. And that’s the kind of investor we’d rather work with. After all, isn’t good decision-making the point?

Weekend Reads

As the cycle of relief and despair over Greece winds relentlessly on, it’s getting hard to remember what financial reporters used to attribute every day’s market moves to. However, the world marches on, and there are, in fact, stories that are not about Greek debt or the price of oil. Here are some we’re reading as we head into the weekend.

  • Ever wonder where all of the nuclear plants in the US are? Wonder no more. (Reuters)
  • Great interview with one of our favorite bloggers, Josh Brown, about his upcoming book. (AdvisorOne)
  • The title says it all: “Dear Investors: Prepare For The Market To Rip Out Your Hope, And Consume It In Front Of Your Eyes” (Business Insider)
  • Looking at the recession as economic time travel. (The Economist)

And just for fun:

  • A painter who creates a work of art in less than 8 minutes. (Youtube)

Financial Media Wising Up? Reminders on Managed Futures

It’s not exactly a secret that managed futures has gained in popularity in recent years. In fact, from 1980 to mid-2011, assets under management for the asset class increased by over 800%, rendering managed futures as one of the fastest growing alternative investments available. That kind of growth has attracted a fair amount of media attention. We discussed in the past how media coverage of the asset class has had struggles with accuracy, but we have to say, 2012 coverage, in general, has been much better than in years past.

A new article up at Financial Advisor, for instance, does a decent job of making the right argument about managed futures- that you need to understand the way managed futures performance works before you invest. There were a few points of contention, though. Two paragraphs, in particular, stuck out to us:

Proponents of managed futures say the strategy provides diversification by investing in a broad range of assets that offer non-correlation to traditional long-only stocks and bonds. Many investors interpret “non-correlation” to mean that managed futures should shine when traditional assets stumble. But that’s not always the case.

Managed futures, as measured by the Altegris 40 index, lost 3.14% last year. In comparison, the Nasdaq Composite dropped 1.8% the S&P 500 was flat and the Dow Jones Industrial Average gained 5.5%. And the 13 managed futures funds tracked by Morningstar that traded for the entire 12 months last year had an average negative return of 6.92%.

Two things come to mind here. For one, it’s incredibly important to remember that non-correlation does not equal inverse correlation. Inverse correlation means that if investment A goes up, investment B goes down, and vice versa. Non-correlation means that the performance of investment A is not linked to the performance of investment B. So, when we say managed futures is non-correlated to other traditional asset classes like stocks and bonds, it means that gains or losses there, statistically, historically, do not influence managed futures performance in one way or another. It is this kind of non-correlation that fuels arguments for crisis performance benefits.

For two, it’s important to remember that managed futures mutual funds and managed accounts are very, very different. Morningstar may report managed futures mutual funds down an average of -6.92% in 2011, but the BarclayHedge CTA Index (an admittedly imperfect proxy for asset class performance) was down a mere -3.00% (boasting 565 index constituents in comparison to the 40 in the Altegris 40).  A loss is a loss, but if you have the capital to get into a managed account and the transparency, liquidity and tax benefits associated with such an investment, the performance numbers speak for themselves.

That being said, we’ll take articles like this over poorly researched pieces riddled with baseless claims any day of the week.

Presidentially Prescient Market Moves

As the Republican primaries continue on, a big topic of conversation has been how individual presidents would impact the economy. Ritholtz has always done a pretty good job at digitally shaking his head at these kinds of conversations (see here, here, and here, for starters). That being said, his dismissing of the President’s impact on market movement is typically looked at from a 20,000 foot perspective. What about the immediate aftermath?

Behold- Presidential elections, who won, the Dow’s response the next day, and mood one month later.

Dow Movements After Presidential Elections

Disclaimer: Past performance is not necessarily indicative of future market movements.

You’ll notice that it really didn’t matter if the election brought in a big business advocate or an anti-business agenda. It didn’t matter if an incumbent was voted up or not. In fact, the average response one day later was -0.55%, and one month later, we saw average returns of -0.11%, in what looks like a case of the old adage ‘buy the rumor, sell the fact’.

In other words, quit trying to call the markets by primary numbers. You might as well throw darts blindly.