A Wealth of (Managed Futures) Common Sense

If you haven’t had the chance to check out the work of Ben Carlson over on his blog, “A Wealth of Common Sense,” we highly suggest it. We’ve written about his thoughts and ideas a couple times (here and here) and we couldn’t help but notice the subject of his musings on doing what works for you in his latest post, “The Importance of Intellectual Honesty in the Markets” is of Managed Futures.

“Managed Futures is a trend following strategy that trades futures contracts both long and short depending on the direction of the markets. The strategies are typically diversified across stocks, bonds, interest rates, commodities and currencies and follow a systematic approach. Also called CTAs (commodity trading advisors), these funds got a ton of attention following the 2008 crash because they were one of the few places to earn positive returns when stock markets around the globe sold off anywhere between 35-55%.

I looked at the Credit Suisse Managed Futures Index going back to 2008 and compared it to the annual returns on stocks, bonds and a 60/40 stock/bond portfolio through June of this year:

Asset Class Performance since 2008(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: A Wealth of Common Sense

But it wasn’t just his feature of explaining the asset class of Managed Futures, it’s about how investors tend to chase performance, getting in at the highs and out at the lows. As Ben puts it:

“The biggest problem most investors face is that they invest in something like managed futures after they see the impressive results it had in 2008. Then they bail when it falters. Or they change their strategy to a low cost indexed buy and hold approach after seeing how well it’s done since 2009. Once again, many will bail during the inevitable down period.”

Which fits quite nicely with our “In at the Highs out at the Lows” Managed Futures chart.

Managed-Futures-Performance-vs-asset-flow-1024x521(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: In at the Highs, Out at the Lows 

Back to Ben Carlson:

“Despite these numbers, I don’t think it makes sense to completely write off (or pile into) a strategy simply because it’s had a poor (or good) run over the past cycle. This is just one fairly short time frame. I’m all about intellectual honesty when discussing the markets. I don’t believe in disparaging someone else’s strategy just because I don’t invest that way. My motto has always been, ‘do what works for you, as long as it helps you reach your goals and allows you to sleep at night.”

We couldn’t have said it better ourselves, but since we’re in the Managed Futures space, we can’t help but take it a step further. We want to add one of Ben’s sentences.

“It’s worth noting that the Credit Suisse index isn’t representative of all trend following strategies, but it does give you an idea about the struggles the space has endured following the crash.”

The fact that the index isn’t representative of all trend following strategies is definitely worth noting, and shows Mr. Carlson is no newcomer to this game. But here’s where things get even a little more interesting. Because not only is the index not representative of all trend following- but trend following is not representative of all Managed Futures. As we talk about in our Managed Futures strategy review every year, there’s also Short Term, Multi-Strategy, Specialty, Agriculture, Spread, and Options strategies.  Not to mention the managed futures-like Global Macro programs. Which is why those who find managed futures ‘works for them’, in Ben’s parlance; may not have found it to be as much of a struggle as the chart suggests.

For instance, in 2013, the Barclayhedge Agricultural Traders sub index was up 5.71%, when the Credit Suisse index was down -2.6%. In 2011, The Barclayhedge Discretionary Traders Index was up +2.75%, while Credit Suisse was down -4.2%. In 2012, the Attain Short Term Fund was up 10.29%% while the Credit Suisse was down -2.9%. {Disclaimer: Past performance is not necessarily indicative of future results}. Of course, you would need a crystal ball to know which of those sub strategies was going to perform each year and which weren’t; but you get the point. Just like small cap stocks can diverge from large cap, or Asian stocks be up while US stocks down; different types of managed futures strategies can, and will (and have), diverge from the poster child trend following strategy. That’s why our Philosophy is to surround a core allocation to trend following with these other strategies to ‘diversify the diversifier’.

How about a Longer View:

Which brings us to a tweet asking for a little more data – something we’re happy to dive into.

 

 

Here’s what a 60/40 portfolio looks like using Carlson’s same table, with the Sharpe ratio added in to compare the different return and volatility levels (although you know we’re not huge fans of the Sharpe):

Asset Class Ratio Addition of Managed Futures
(Disclaimer: Past performance is not necessarily indicative of future results)
Data = (60/30 MF) is 60% SPY & 40% DJCS Managed Futures Index
Other data from: A Wealth of Common Sense

But as Mr. Carlson said, this is a “fairly short time frame.” What does it look like if we push it out back to the inception of the Credit Suisse index?  And while we’re at it, we’ll be the first to tell you managed futures isn’t meant to replace bonds (although that might not be a terrible idea in a rising rate environment). So what does it look like when diversified into managed futures and Bonds with an allocation of (45% Stocks / 28% Bonds / 30% Managed Futures)? Here you go:

Ratio Two 1994-2015
(Disclaimer: Past performance is not necessarily indicative of future results)
Data: DJCS Managed Futures Index
S&P 500 = SPY Bonds = Barclays Global Aggregate Bond Index

You can see argument for a managed futures allocation in these longer term stats, which speaks directly to Carlson’s main point:

“I don’t think it makes sense to completely write off (or pile into) a strategy simply because it’s had a poor (or good) run over the past cycle.”

For more information on Managed Futures Performance, check out our Whitepaper highlighting the “Performance Profile: Managed Futures

To be 4.7 Exempt or Not To Be, That is the Question

Despite the having the odds stacked against them, we hear from new CTAs and hedge fund managers every day. This isn’t to say that we discourage new CTAs, our 108 Tools to Help grow your CTA Business can speak to that, and we recently discussed how these emerging managers are typically better performers.

But we won’t sugar coat things, it isn’t easy going from $0 to $10 million, $10 to $100 million, or $100 million to $1 Billion under management. Which led many CTAs to RCM’s Alternative Investment Conference this week to hear best practices and so forth. And one question among new CTAs that got debated after the event with some fervor was whether CTAs should be “4.7 exempt” CTA or not.

This is a little inside baseball, but it’s an important question when a CTA is just starting out. For those of you that have no idea what a 4.7 exemption is; filing a 4.7 exemption means that a CTA is exempt from certain regulations such as filing a Disclosure Document with the National Futures Association (“NFA”) – but in exchange for that relief, can only accept QEP investors (Qualified Eligible Investors, which are essentially investment/insurance/bank type companies and private investors with over $2 million in investments) into their program or fund.  Conversely, a CTA can file a Disclosure Document with the NFA and accept any investor they deem suitable for the investment, with the regulatory thinking perhaps that the well-heeled investors don’t need everything spelled out for them.

So, the decision facing a CTA when starting out is whether to:

  1. Avoid the regulators and cost of drafting a Disclosure Document, but only go after the $2million in investable assets and up QEP investors.

Or

  1. Deal with the regulators and draft a Disclosure Document (and re-submit it annually), and go after any investor who can afford the minimum investment.

Now, what we were hearing at the Expo was that the general rule of thumb CTAs get from lawyers is to file the exemption to avoid the hassle of filing D-Docs with the NFA. Most new CTAs, it seems, are being coached to avoid the 4.7 Exemption. To which we say… get a new coach. If you’ve got a golden Rolodex filled with names of multi-millionaires, heads of banks, and Chief Investment Officers at pensions and endowments – sure, the 4.7 exemption can save you some hassle.  But what if you’re trying to grow organically and need every set of eyeballs you can get on your program. Is avoiding a few days of hassle with the regulators each year worth eliminating a big portion of the investing public?

We say no… but haven’t ever really looked at the statistics to see just how many potential investors 4.7 exempt CTAs are ignoring by saving some hassle.  Now, this gets a little difficult, as there are a lot of definitions for both that include insurance companies, pool operators, and foreign individuals (all of whom are QEPs regardless of net worth or income… in a blatant example of the US regulators saying ‘you’re not our problem’). But if we assume all the non-human type of investors basically balance each other out, and represent just a small portion of the overall numbers – then we’re down to looking at how many investors fall in each net worth bucket.
For sake of argument, let’s assume that accredited investors have $1 million in net worth, and QEPs have $2 mm and up in net worth, remembering that all QEPs are also accredited. If you meet the higher standard, you automatically meet the lower standard; and do some quick back of the napkin math to see that there are:

Over $2 million net worth, QEPs = 1.8 million households

Accredited = 8.5 million households

Non Accredited, with investment accounts = 20 million house holds

US Wealth

(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: CNN
(Note = We know the data is from 2007. It’s the most recent data we could find)

Now, this ignores a big part of the puzzle, which is how much money each of those buckets has. It’s well documented that the top 1% command more than 48% of the world’s wealth. But ignoring for a fact that there might be 4, or 40, times more money concentrated at the top, there’s still about 4 times more investors with more than $1 million than there are with over $2 million, meaning, for us – to ditch that 4.7 and go ahead and file that D-Doc.

Sources:

QEPs = Wealth in America — (CNN)

Accredited = How Many Accredited Households Exist in the US — (InvestGeorgia)

Non-Accredited with Investment Accounts = (Census)

For more on the 4.7 exemption and others at NFA, see here:

CFTC 4.7 Exemption

NFA Exemption Descriptions

Podcast: The Many Avenues of RCM Alternatives

Where is the combined Attain/RCM headed? Founder and CEO Bobby Schwartz sat down with Options Insider recently for a quick podcast (radio) recording. Here’s your chance to see how we’re helping the funds and managers who utilize RCM’s services from the horse’s mouth:

Options Insider

Here’s the link to the Options Insider Radio.

Here’s the direct link to the MP3.

108 Tools to Grow your CTA Business

It’s that time of year again for Alternative Investment folks to storm Chicago for two different conferences, NIBA and the CTA Expo, with emerging and seasoned managers alike speaking, networking, and cocktailing in between sessions on Liquid Alts, compliance, and history lessons from CME founder Leo Melamed.

A little over a year ago, we came out with a piece entitled, “So You want to be a CTA?” explaining the ins and outs, and steps needed before making a real go at it. But where’s the list of software, lawyers, accountants, and what not – that CTAs use and rely on to make their business go?

Without further ado – our list of 108 or so commodity trading advisor resources:

(Note, firms are listed alphabetically in each category, and we’ve used their own descriptions, edited to remove the ‘we’re the best’ language… and – we can’t take full credit for aggregating all of these, The CTA Expo service provider directory gave us a great start).

 

 

Kick Ass consultant, broker, marketer, lead source, pool operator, AUM Grower

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Alternative Links: Podcast Edition

We’ve now made it a little easier for anyone who ever wanted a pocket sized Jeff Eizenberg (one of the partners at Attain), who sat down to do one of the CME’s Managed Futures Podcasts (which is a great resource by the way). The topic was “Strategy and Market Diversity in the Managed Futures Industry.” If you don’t want to listen to the 15 minute podcast right now, you can download it for free on iTunes and listen to it later. Without further ado…

Strategy:

“I think Managed Futures is truly one of the more unique asset classes out there.”
– Jeff Eizenberg

Strategy and Market Diversity in the Managed Futures Industry – (CME Managed Futures Podcast)

2 Great Ways to Invest in Commodities (Doesn’t like or dislike managed futures) – (Eric Mancini)

Alternative Investments: A 2-minute Introduction Video – (William Blair)

Performance:

CTAs bounce back to positive performance in August – (Monovisione)

Regulation:

CFTC Said to Alert Justice Department of Criminal Rate Rigging – (Bloomberg)

Industry:

Why CME, CBOE are on a weight-loss plan – (Crains Chicago)