Diminishing Market Diversification Resulting in Diminishing Returns?

In managed futures, people like to tout exposure to commodities. Now, at least one firm is betting that excluding all commodities could be the recipe for success. InvestmentNews reports:

By leaving commodities out of the SSgA SSARIS Managed Futures fund altogether, the fund should have even lower volatility, according to SSgA. In a prospectus filed with the Securities and Exchange Commission last Friday, the company also said it would be targeting futures contracts with low daily standard deviation. Marie McGehee, a spokeswoman for SSgA, declined to comment on the filing.

The downside of leaving out commodities could be lower returns. While commodities tend to have the highest volatility, they’re also a potential source of big returns for managed-futures funds, which basically are trend-following strategies.

It was that second paragraph that stuck out to us most. See, as an Introducing Broker that works with a wide variety of CTAs in the emerging space, we’ve been looking at the distinction between programs with hefty commodity exposure, and those that tend to stick to financials of some form. As it turns out, the idea of biasing exposure away from commodities is nothing new. In fact, this strategy has been embraced by some of the largest players in the industry. Take Winton, for instance:

They’re already gravitating away from the commodities that gave managed futures their name. In some ways, one might interpret this to mean that the “new” strategy isn’t that new at all, and may just come close to replicating titan performance. But even then… is that the kind of performance managed futures investors really want today? We took a look at the average negative and positive monthly returns for some of the most well-known CTAs out there, and here is what we found:

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

These guys may have the big names, but they certainly don’t have the same kind of big performance they made their names with anymore. For a mutual fund strategy, which, as we’ve written about in the past, will frequently cannibalize their own performance with excessive fees, such diminishing returns, in our opinion, are likely less than appealing. But, hey – best of luck.

Comments

  1. Hello again! Interesting report. I just hope that these guys did not use some genetic programming engine to curve-fit a few indicators to past performance because they will be up for surprises. As a matter of fact, I just saw your post right after I published a new article in my blog that argues that this type of funds are an easy prey for various market predators. (I will not provide another link to my blog here but the title is “Systematic Stock Index Trend Followers Are An Easy Prey”). I wish them good luck but things do not look good for stock index trend-following funds.

    By the way, “low daily standard deviation” sounds too vague. I guess they will be calculating that over a certain period but do you guys know any of the details?

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Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

*The mention of specific asset class performance (i.e. +3.2%, -4.6%) is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any 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 and self reporting biases, and instant history.

The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on Attain’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by Attain, and averaging of various indices designed to track said asset classes.

It should be noted that past market performance is not indicative of future market movement.No market data or other information is warranted by Attain Capital Management as to completeness or accuracy, express or implied, and is subject to change without notice.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.