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)

 

Weekend Reads: 273 Perfect Brackets Left

JACK BOGLE WARNS: Prepare For Two Massive Market Declines In The Next Decade(Business Insider)

Personal Finances > Portfolio Management – (A Wealth of Common Sense)

Ep. 326: Kabir Sehgal Interview with Michael Covel on Trend Following Radio – (Michael Covel)

What The Record Plunge In The Euro Means For Investors – (Dana Lyons)

March Madness:

273 Brackets Still Perfect After Thursday’s Game – (FiveThirtyEight)

Big Data Probabilities for Match Madness – (Attains Alternatives Blog)

Interesting:

When Global Warming Kills Your God – (The Atlantic)

Yesterday’s Atomic Green Bomb

Ouch… that was one heck of a day yesterday for those long the US Dollar and short just about everything else against it, including Grains, Energies, and Foreign Currencies (we’re looking at you – Euro).  When things are up this much in a single day… over 1.25% in stocks, +2% in metals, plus 4% in energies, over 1% in grains and some +2% to +3% moves in foreign currencies – the quote board starts to take on that atomic green color (Atomic GreenNuclear Green) {Past performance is not necessarily indicative of future results}.

Neon Green numbers(Disclaimer: Past performance is not necessarily indicative of future results)
Table Courtesy: Finviz

The good part about trend following strategies are their ability to capture significant parts of -50% moves down in Gold and -20% moves down in the Euro. The bad parts, are that they aren’t quick enough to avoid quick spikes like this in the opposite direction. They can’t be, or they will get stopped out of those long moves. They don’t react to every feint, instead preferring market prices to ‘verify’ when a trend is over.

But here’s the silver lining. With nearly every position in their portfolios going against them yesterday, many systematic programs we track were only down between -1.5% and -3.0%, showing that even when an Atomic Green bomb blows up in its face – the risk management is in place to limit collateral damage.  The next question, and more important than a day’s movement, is if this bounce turns into full on trend reversal in the US Dollar, which will add to the pain until positions are reduced/eliminated.