Moving Markets Change Asset Scoreboard

As winter turns to spring, the ground beneath the asset classes are shifting, with April looking a bit different than the start of the year. The worst performing asset class coming into the month (Commodities) recorded a 10.70% return (mainly due to the rally in crude) for the month to bring it out of the red for the year. Meanwhile, the asset classes that has been outperforming all others over the past 5 years (Real Estate) took a -5% hit last month, to make it the bottom performer and in the red for the first time in a couple of years, while Managed Futures as an asset class recorded a -3% loss on the month, but remains on solid footing for the year. Will the ground continue to shift? You can bet on it (just look at bonds so far in May).

Asset Class Scoreboard April table

 

Asset Class Scoeboard April 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 April Performance

In a month where the tip-top managers like Winton post its worst month since 2008 (-4%) and AQR’s Managed Futures Managed Futures Fund was down -3.21%, it isn’t shocking that the 4 Managed Futures indices we track were down an average -2.03% in April {Past performance is not necessarily indicative of future results}.

Some of this might be attested to the rally in crude when many managers were still short, or not in the market at all. Metals remained choppy while there were trend reversals in long bond and long dollar / short foreign currency trends. These trend reversals might actually create new opportunities for trend followers in the future if they persist. That’s the true question. Will crude move back to 100? Will bonds continue to fall, and will the U.S. Dollar rebound or return to the 80 range? Only time will tell. We just hope any of these trends stay long enough for Managed Futures strategies to capture them.

Managed Futures Indices Performance(Disclaimer: Past performance is not necessarily indicative of future results)
(Barclayhedge CTA Index: 34% of funds reporting)

P.S. –Attain’s Family of Alternative Funds performance will be posted shortly. To get monthly performance and research updates on the family of funds, sign up here.

 

The Top 10 Managed Futures Performers of March

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.

 (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 ProgramsMar. RORMax DDMin. Invst.
Rosetta Capital - Macro (QEP)14.60%-30.61%50,000
DUNN Capital -- World Monetary (QEP)9.30%-60.06%500,000
Vantage Capital -- Growth9.21%-32.53%100,000
Dorset Futures -- E-mini8.09%-33.65%100,000
Camkay Capital - Stock Indices Short Term7.61%-20.79%100,000
Dreiss Research Corp. (QEP)6.62%-51.44%1,000,000
Emil Van Essen -- Spread Trading 6.03%-36.21%50,000
Keck Capital -- Keck Program (QEP)5.79%-28.98%2,000,000
Futures Truth Company -- Options 200k (QEP)5.33%-30.41%200,000
Hyman Beck & Company -- Global (QEP)5.22%-33.24%1,000,000

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

4 Ways Futures Accounts Get Taxed

The reason we dislike paying taxes each year may go beyond the natural annoyance at handing over some of your hard earned money, and have just as much to do with how complicated it can be. In one calendar year, tax codes can change up to +500 times a year and with the IRS having 20% of the their budget cut over the last 5 years, that can create a lot of headaches – and delays. Which might be why John Oliver of HBO’s ‘Last Week Tonight’ reported some tax paying citizens send their checks stained with mustard, or why sitting governors make some not so nice WW2 comparisons to the IRS.

But those of us who trade futures have a little different take on tax season, where we feel a little more celebratory. You see, futures markets don’t just give you exposure to world markets and the ability to go both long and short – there’s some real tax advantages as well. It all starts with exchange traded futures and options on futures being labeled as ‘Section 1256 Contracts’ by the IRS.

1256 Contract

Unlike stocks, futures based investments are based on their marked to market value at the end of the year, so any open trade profits or losses in the account are treated as realized profits or losses as of the last day of the year. This is generally good news for investors, as futures gains or losses are treated as 60% long term capital gains and 40% short term capital gains, NO MATTER the holding period. For example, an investor who holds a futures position for just a few minutes, or hours, can book 60% of the profits on that trade as long term gains (and pay the lower long term capital gains rate) – even though the trade was anything but long term.

In addition, futures based investments do not require the accounting of individual trades. This is a godsend for any of you who have spent hours searching through old brokerage statements from 4 years prior trying to find the cost basis for a certain stock. There is also no trade by trade accounting in futures, no wash sale rules, and losses can be carried back three years on futures based investments. Not too shabby.

But what if you’re not really a futures ‘trader’? What if you’re more of a futures investor, accessing the futures markets through a professional manager utilizing either separately managed accounts, private funds, or (as is becoming more and more normal) mutual funds and ETFs.

 

Separately Managed Accounts:

An investor having their futures account managed for them by a professional commodity trading advisor (CTA) gets all of the same futures market based tax treatment outlined above, as the manager trades the same exchange traded futures. That’s the good news, but there’s a catch – the CTA’s management and incentive fees are not part of the section 1256 gains and losses, meaning the 1099-B reports the marked to market profit or loss before these fees.  All hope is not lost, however, as investors can offset some of those fees by doing itemized deductions and taking investment-related deductions. Problem is, such miscellaneous itemized deductions are only deductible to the extent they exceed 2% of your adjusted gross income. So, an accredited investor making $300,000 per year can only deduct expenses over $6,000 (2% of $300k).  Investors utilizing separately managed accounts receive a 1099-B from the Futures Commission Merchant holding the account, with the total amount of fees paid to the CTAs available via your broker or the CTA you’re invested in (there’s no required government report outlining the total fees).

 

Privately offered Funds

Which brings us to investors who access the futures markets through privately offered funds, or as their also known – commodity pools. Fund investors haven’t really ‘traded’ futures markets themselves or had futures traded in accounts in their name. They’ve invested in a partnership (for tax purposes) which does the futures trading, and the partnership reports what portion of the futures trading profit or loss is taxable to each investor every year. The good part of that is the tricky 2% of adjusted gross income barrier goes away, with the fund able to offset all the expenses to the fund (including management and incentive fees paid to the trading advisor) against profits. The (semi) bad part… the investor receives a K1, which in our experience never gets into your hands as quickly as you would like, potentially delaying your tax filing. Many people find a single K1 much easier come tax time, however, than multiple 1099-Bs outlining futures profit and loss.  Finally, there is no taxable event upon redeeming your investment in a private fund, meaning you don’t pay capital gains on the difference between the sales price and purchase price (you’ve already paid tax via the K1 numbers each year).

 

Liquid Alternatives – Mutual Funds & ETFs

Which brings us to the fast growing world of alternative investment mutual funds and ETFs. The biggest difference in mutual fund taxation is that there is a profit or loss from the buying and selling of the mutual fund (not just from what’s happening inside of the fund like in the private fund/K1 scenario). Buying a mutual fund for $5,000 and selling it later on for $7,000 will result in $2,000 for taxable capital gains. Further, it’s not abundantly clear what happens to the blended 60/40 tax treatment of futures markets within a mutual fund utilizing such contracts. From what we can tell, it doesn’t survive the mutual fund wrapper (if we’re wrong on that, please comment on this post), with investors getting a 1099 listing the annual capital gain and dividend income from the mutual fund and that being treated as normal capital gains income, going into either the long term or short term buckets, not both. But ignorance is bliss for many in this regard, as they willingly sacrifice whatever tax savings may be present from a K1 structure in order to receive a 1099 1 to 2 months earlier.

Happy Tax Season!

If you have any questions about different tax codes or exposures when it comes to futures trading, please feel free to give us a call or email us.

Are Alternatives’ Assets Here to Stay?

There’s no doubt the general conversation around Managed Futures the past couple weeks hasn’t been performance, but assets. First Moningstar reported an inflow of $1.4 Billion for managed futures funds in the first two months of 2015. Then the Wall Street Journal caught on, and now that Barclayhedge has released asset flows of $5.7 Billion in February, we’re starting to get the whole picture… There’s a lot on money flowing into Managed Futures at the moment. But will the assets last? And will the long term growth actually come from Managed Futures or their Liquid Alternative counterparts?

First, we’ll look at the charts  from the major publications regarding Managed Futures, Liquid Alternatives.

Wall Street Jounral Asset Flows(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Wall Street Journal

This is no shock to anyone who has been following the industry for the past 5 years. Liquid alts have exploded since 2009 with managed futures being a popular liquid strategy selection. But does the chart look the same when you throw in all of the Managed future folks (managed accounts, private funds,  and liquid alts)?

CTA AUM(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Barclayhedge

While assets on the Liquid Alts side have been booming over the past couple of years, Managed Accounts have actually been struggling (when you take out the heavyweights like Bridgewater and Winton) . However, investors are buying into all kinds of Managed Futures exposure, recently. In February, Barclayhedge reported inflows of $5.7 Billion, a 3 ½ year high for CTAs.

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