Asset Class Scoreboard Two Months In

In a “business as usual” market environment with new all time highs in the stock market indices over the past year, it’s fun to play the game, which asset class has done the best since the beginning of the year or over the past twelve months. You might be surprised as to who’s on top and who’s not.

Asset Class Scoreboard Table Feb 2015Asset Class Scoreboard Chart(Disclaimer: past performance is not necessarily indicative of future results.)
Source: All ETF performance data from Morningstar.com
Sources: Managed Futures = Newedge CTA Index, Cash = 13 week T-Bill rate,
Bonds = Vanguard Total Bond Market ETF (BND),
Hedge Funds= IQ Hedge Multi-Strategy (QAI)
Commodities = iShares GSCI ETF (GSG);
Real Estate = iShares DJ Real Estate ETF (IYR);
World Stocks = iShares MSCI ACWI ex US Index Fund ETF (ACWX);
US Stocks = SPDR S&P 500 ETF (SPY)

Managed Futures Rankings

We doubt anyone is staying up all night waiting to see who made it into our semi-annual rankings the way they watched  Doogie Howser dishing out awards in his underwear; but we do take this stuff seriously around here, and are excited to announce we just finished calculating our latest Semi-Annual Managed Futures Rankings, updated through January 2015. The rankings are something we do every 6 months in pursuit of answering that eternally difficult question to answer: “What’s the BEST managed futures program?”

2015 Badge

Who’s the best is a tricky question? Do you mean: Best last year? Best for all time? Best risk adjusted return? Best in terms of lowest drawdowns?

We’ve dedicated extensive resources over the years to analyzing and testing a rankings system that would best reflect what we believe to be the important metrics for measuring skill in this investment space. Our rankings start by filtering the BarclayHedge database to a smaller subset of managers which have at least 36 months of track record, are registered with the NFA, offer managed accounts, and are viable business concerns (no prop trading records for example).

Overall, there are 8 separate categories, from best programs with risk adjusted performance, best reward managers, as well as best on our Attain Focus list. Click here to download the report and see who made it. There’s many newcomers after a banner year for managed futures in 2014, while many familiar names continue to dot the rankings as they have done report after report for years. Enjoy! And don’t forget to pick up the phone and dial our team with any questions on the who, what, when, and why behind all of the managers listed.

10 of the Best Managed Futures Performers in January

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 July 2014). New rankings coming this week.

 (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 ProgramsJan. RORMax DDMin. Invst.
Purple Valley Capital - Diversified Trend 19.55%-49.34%1,000,000
KeyQuant SAS - Key Trends (QEP)15.74%-19.15%10,000,000
Quality Capital - Global Diversified (QEP)13.51%-38.77%10,000,000
Conquest Capital -- Conquest Macro (QEP) 13.23%-56.09%10,000,000
IMFC -- Global Investment (QEP)13.08%-20.27%2,000,000
Clarke Capital -- Jupiter12.15%-44.78%3,000,000
Dreiss Research Corp (QEP)11.90%-51.44%1,000,000
Robinson-Langley Capital 11.75%-43.29%200,000
Molinero Capital -- Global Markets 11.46%-23.04%3,000,000
Revolution Capital -- Mosaic (QEP)11.27%-56.22%10,000,000

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

Diversification Sucks

With US Stocks pushing up to new all time highs once again this week, we’re seeing more talk of going with simple over complex, just doing the basic 60/40 portfolio, and so forth. We’re seeing more of the feeling – “Diversification Sucks!  I would be waaaaaaaay better if was just 100% long US Stocks… or even better, 150% or 250% long.”

We had some clever things to say on this topic, but found the following post out there by James Osborne of Bason Asset Management (from a few months ago) which said it much better:

[Read more…]

Alternative Links: Investor Greats

The Problem With Intuitive Investing – (A Wealth of Common Sense)

Follow-up: Will Warren Buffett Buy an Oil Company? – (The Reformed Broker)

Is Warren Buffett a closet technician? – (Midnight Trader)

Managed Futures:

Improving on the correlation benefits of managed futures – (Futures Magazine)

Managed Futures Performance – (Hedgeweek)

Are You Looking in the Right Place for Hedge Fund Returns? – (MoneyBeat)

JLN Managed Futures: CTAs begin 2015 with a stellar January – (JLN)

Asset Allocation:

Asset Allocation Intangibles – (A Wealth of Common Sense)

The Efficient Frontier Part 2 – (Attains Alternatives Blog)

Crude Oil:

Hedge Funds Turn Most Bullish on Brent Oil in Seven Months – (Bloomberg)

Get Ready for $10 Oil – (Bloomberg View)

Forex:

Leave currency trading to the professionals – (Knoxville News Sentinel)

The Efficient Frontier Part 2

Contrary to popular belief, The Efficient Frontier isn’t our attempt to write about Star Trek (we can only dream); it’s actually an investment/asset allocation concept put forth by those who believe in Modern Portfolio Theory. If you have no idea what we’re talking about, we covered the concept in depth last year which you can find here, and back in 2010, here. For those wondering how the curve has changed, let’s take a look.

The data from last year’s Efficient Frontier (Jan ’94- Dec ’13) is the purple line and this year’s (Jan. ’94 – Dec ‘ 14) is the blue line:

Updated Efficient Frontier

(Disclaimer: Past performance is not necessarily indicative of future results)
Data Stocks = S&P 500, Bonds = S&P/Citigroup International Treasury Bond Index EX-U.S Index,
Managed Futures = Dow Jones Credit Suisse Managed Futures Index

All around, last year’s returns moved the Efficient Frontier up and to the left, meaning, all portfolio’s increased returns while eliminating volatility (a win-win for everyone).  This year’s returns also lifted the (36/24/40) portfolio from 6.44% to 6.68%, while actually slightly decreasing volatility by 0.02%, proving once again to be the most optimum portfolio mix  (highest return with lowest volatility) over multiple investment environments in the past {past performance is not necessarily indicative of future results}.

The comparison of these two curves illustrate a unique situation in which Managed Futures was able to increase its returns without increasing its volatility. Some of that may have to do with the lackluster performance the years prior to 2014. Meaning, Managed Futures returns might have caught up to its volatility {past performance is not necessarily indicative of future results}. Meanwhile, the traditional 60/40 portfolio all but stayed the same.

We realize that tacking on a year of returns only offers a small lens of how each portfolio performs over time (even if this is looking at data over the past 20 years). Before the current never ending bull run that we’re now experiencing, the Managed Futures diversified portfolio continued to offer the most optimum portfolio mix. Additionally, a 100% allocation to Managed Futures used to offer the highest return with the highest volatility, while a simple stocks and bonds portfolio only offered the lowest return with medium volatility. You can see that chart posted by CME back in 2008, here {past performance is not necessarily indicative of future results}.

Finally, for the drawbacks of the efficient frontier chart. It’s as simple as risk doesn’t necessarily translate to just volatility. It’s the same issue that most have with the Sharpe Ratio, and doesn’t consider downside volatility and drawdown to name two…). Meaning, these types of charts and ratios treat volatility as a bad thing, when low volatility can be not so smart.

What You Don’t Know Can’t Hurt You?

We’ve been seeing more and more posts lately (perhaps it’s just our reading list) that essentially say something along the lines of – why make everything so complex in investing, just stick with the simple stuff.  The latest culprit comes from Reformed Broker, suggesting that while the traditional 60/40 portfolio surely isn’t the best portfolio, an average investor probably won’t know the difference between it and a better one – in advance – so why try. Here’s what he had to say:

“Are there better ways to invest than the classic 60/40? Sure there are. Will you be able to identify them in advance? Can you bear the added risk of a portfolio tilted toward higher expected returns, through the really rough times where that extra return is actually earned? What are the costs associated with supposed “better” investment strategies? Can they be justified on an after-tax, net of transaction expense basis?

Those questions are probably some pretty high hurdles for a lot of the so-called “better” or more exciting strategies to surmount, no?”

We’ve been through this before. First, with Business Insider looked at the past 20 years of returns. Next came, one of our favorite bloggers, Barry Ritholtz saying simple beats complex. We looked back at the past 3 cycles (every 5 years) after that read, and found that simple beating complex wasn’t as simple as it has appeared over the past few years, showing a bit of recency bias. In the latest attempt, Reformed Broker uses a chart from Research Affiliates’ Chris Brightman to show that the old standy 60/40 portfolio has an annualized rate of return of 6.5% and volatility at around 9% – putting it square in the middle of all these other more complex investments designed to beat it.

Returns past 20 years(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Reformed Broker

Our quick thoughts on this chart:

1. It forgets the other crash.

“But now consider the fact that this period, between 2005-2014, encompasses one of the worst stock market crashes and economic downturns in history.”

What would happen if you moved the last 10 years, to the last 15 years to include the tech bubble crash? Something tells us those numbers might be a little different.

2. It Assumes Volatility is Bad.

We’ve been over how there’s more to risk than volatility (making the Sharpe ratio not so sharp). And depending on where you are in your investment journey, low volatility can actually dampen your opportunities for gains. For more on this see our “Low Volatility not so Smart.

3. Bonds = Great! Anything with 40% bonds in it has been stellar the past 5 years, as bonds have defied gravity (cue Wicked chorus). Add the ‘09 to ’14 stock market rally, and it’s no surprise the 60/40 is looking great alongside everything else. This is like saying Tom Brady is great right after he wins the SuperBowl. Saying he’s going to win it again next year is an entirely different, thing, however.

4. Commodities Suck?  We wish the entire ‘Commodities’ asset class was re-named ‘Long-Only Commodities’, because that is the thing causing terrible returns with volatility. Commodities at  -4% annualized return, and a roughly 18% volatility. That’s rough.  But Reformed Broker, haven’t we’ve bugged you enough by now to merit at least a mention of the asset class that goes both long and short commodities – managed futures.  They use commodities, but don’t look like commodities when measuring return over volatility. If you want to learn more about it check out our about Managed Futures page.

5. Speaking of Managed Futures.  If we add them to the table – here’s how that would look. And if we did a single program – our Attain Trend Following Fund would literally be off the chart… above the title. But they could counter with their own ‘off the charts’ single stock with Apple or similar, which is a fair point. So we added Managed Futures as a whole via the Newedge CTA Index.

Past 10 years with Managed Futures(Disclaimer: Past performance is not necessarily indicative of future results)
Managed Futures = Newedge CTA Index

We’ve done this before (looking at “other” efficient frontiers), but what if we look at the old 60/40 side by side with a portfolio which diversifies 30% into Alternatives (and not just any alternatives – our particular brand, managed futures. Here’s what we found.

60/40 vs. Diversified

60 40 Portfolio Breakdown(Disclaimer: Past performance is not necessarily indicative of future results)
Explanation: ROR = Rate of Return, 60/40  = 60% Stocks (S&P 500) + 40% Bonds (Barclays U.S. Aggregate Bond Index).
30% alts = 42% Stocks + 28% Bonds + 30% Newedge CTA Index
(Data From : 2005 – 2014 )

The next time there’s an article out there looking at various asset classes over the past 1, 3, 5 or whatever time period…. step back and ask yourself –  if I moved those dates ranges by a couple weeks, 6 months, 2 years, 5 years; how different would those returns be?  Josh Brown surely knows the average 60/40 investor better than most, and definitely better than us. But it seems insulting to their collective intelligence to assume that these 60/40 folks wouldn’t be willing to “jump over hurdles” to find something that might be better than what has been. They surely know that stocks are at all time highs and interest rates are at all time lows, and we can surely all agree that that game can’t last forever – even if it can last for much longer than we think it can.