What do you think of managed futures?

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Feb 2, 2011 10:49 am

When advisors were asked "what are alternative investment strategies?" in a recent Morningstar survey, managed futures was the top answer for 2010. Several broker-dealers, such as Raymond James, have been putting managed futures funds on their platforms, and more and more of these products are coming to market. No one can dispute that these strategies make a great diversifier to a portfolio, but they are not the holy grail. There still seem to be a lot of unknowns in the industry when it comes to managed futures. How knowledgeable are advisors on the investment strategy and are they able to adequately educate clients on this strategy?

If you'd like to elaborate on your use of managed futures or on the industry's knowledge of how these investments work, please contact me at 212-204-4363.

Feb 2, 2011 1:46 pm

Historically, they are literally a sure fire way to lose money. I'd be willing to bet money that of all managed futures accounts over the last 30 yrs, the collective real rate of return is negative. Factoring in asset levels AT TIMES OF RETURN, expenses, and the results of closed offerings. 

Reality should be loud and clear. After a horrible, awful 10 yr period for stocks, we're supposed to have a shining future ahead of us. To not subscribe to that, a person would have to subscribe to the notion that although the past has a 100% track record, that somehow, "this time is different".

Feb 2, 2011 10:57 pm

Too expensive and I haven't seen any great returns that would make me want to offer them to clients.  I think they are enticing to some FA's due to a high payout.

Feb 3, 2011 9:35 am

don't forget to mention your client will most likely not get their K-1 in time for taxes. Usually file late EVERY year.

Feb 3, 2011 11:29 am

Some people are ideologically opposed to using the space, like this
first commenter.  I would like to ask him
what data he used to base these opinions? 
Its quite laughable.  The problem
is he doesn’t know why they work, what allows them to generate returns (ie  momentum effect of commodities).  Bottom
line he hasn’t researched the space at all yet somehow has a strong opinion about
them.

The 2nd
commenter is right, often products offered do have high fees.  But some do not.  Diversification should be the reason they
entice FA’s, not high payout.  The problem
is, if FA’s choose a product based on the payout, chances are it will be a
shitty managed futures product.  So you
get FA’s selling the shitty high payout products, which in turn don’t perform
up to expectations, FA sours on the space, despite the fact that it was the
product that was bad vs. managed futures in general.  

Listen, most of the products you guys have available to you are "cookie cutter" products, many of which I don't think are great, but can still provide value to your clients portfolios.  It's a function of your broker dealers only approving a hand full of managed futures products, those which tend not to be very dynamic.  These products tend to only access a basket of highly correlated trend followers (and those that are easily accessible, not necessarily the best) which tend to have  "long volatility" characteristics, which is great in 2007,2008, but when volatility declined throughout 2009, they are not going to do well.  You have to understand these characteristics.  But most of the trend followers I follow are at their high water mark, its not like they gave back all their 2008 gains in 2009.  (ie +20% 2007; +30% in 2008; -7% in 2009) The question moving forward, do you expect more or less vol in commodities in the coming years?  And if there is eventually a commodity bubble, who do you think can capture this downward momentum? (To the detriment of the long only commodity investors) 

Feb 3, 2011 5:02 pm

Dav, I've done this for 20 yrs. I am dumber than hell with most things in life, but not this.

Feb 3, 2011 8:22 pm

really, I would love to test your knowledge on the subject.  Unfortunatley nothing in this industry is black and white, the fact that you are so ideologically certain is telling.  I would ask you to expand upon your thoughts but I would expect your comments to be so fraught with "the market is always efficient" conjecture that I will not. 

20 yrs? if you were an successful hedge fund manager, this might mean something.  But 20 yrs as an advisor only proves you are a good salesman and can run an efficient business.  Any questions regarding these subjects, you are qualified to answer. 


Feb 3, 2011 9:27 pm

I dunno, dav, I thought your post started out looking good, but tapered off into BS.

Anyway, I would think the burden of proof would be on you ( that the cost of anything managed by suits in another city would justify the costs).

Don't go attacking people's credentials when they have a couple of decades of real experience unless you can back it up with facts.

We are talking about retail clients here, and if you have something that can beat sector ETFs, let's have some specifics, not extended BS or snooty attacks on (real) good advisors.

Feb 4, 2011 1:45 am

Thinking for yourself, avoiding the potholes, and delivering income has little to do with selling or theoretical portfolio construction.  

Feb 4, 2011 6:59 am

I agree with:

the cost issue, brokers really like the trails (if the trail was 1% versus 3% and the cost went down 2% per year, would brokers still like as much)

the performance has been lumpy, and I would guess clients redeem when managed futures go through flat to down years and load up after a good year. I am on the fence. I use a couple and I know Frontier had a really good January. Not so much for Grant Park. Neither had stellar 2010's.

Feb 4, 2011 10:54 am

I ran into a managed futures fund for the first time yesterday in a prospect's account.  He's got a $700k portfolio and the FA threw in $20k of RYMZX.  On the surface it looked like a great move as this prospect has zero exposure to anything alternative.  Not even a high yield bond fund.  So, the 3% position in something alternative seemed to make sense. 

But then I dug a little deeper.  It's a C share.  I'm not a fan of C shares.  I guess that's the Jones training in me.  In this case the expenses on that fund are 2.8%. Ouch.  It was down 4.5% in 2010 and almost 5% in 2009.  That meant very little to me, except that it was down in a couple of years when the S&P was up double digits.  So, the question becomes what's the point? That prospect is paying Rydex 2.8% a year to lose money in a fund that is supposed to be betting on the market up or down.  So either they're really bad at what they do, or it's all smoke and mirrors.  Just another line item on a statement to make it look like the advisor is trying to protect the client.  I'll try to believe that the FA thought he was doing something good for the client and not just trying to beef up his monthly commissions with the C shares.  That's what the other $280K into C shares was about.  

I think if you're going to do it, why not do it with an ETF.  There are probably several indices that are managed futures based, but the DTI seems to be the one that keeps popping up in my research.  Most of the funds I've seen, like the Rydex one, attempt to track that one.  That's got to be difficult to do when you're charging 2-2.8% on your fund.  So, I'd say skip the fund and do the index. 

Feb 4, 2011 12:36 pm

This is another example of where if you use ETFs or no-loads, and charge a reasonable wrap fee (bigger % on smaller accounts) - even with admin fees at a b/d, you can put together great portfolios that provide the advisor (and the b/d) with most of the compensation (where it belongs) and minimize waste to product manufacturers and wholesalers.

If anyone has a killer managed future fund that justifies the expenses, bring it on.

Trying to add value through active management or hedging is the weakest link in the (retail) chain. I realize institutional investing has its own advantages. Confusion even amongst advisors over "what to do" with products is another example of why we need a uniform fiduciary standard between b//d and RIA. There must be only a few b/d manufacturers that would want to hold out and skim high fees from proprietary products or services.

Most of the value is provided by individual advisors, the sooner the majority figure that out, the better for our profession. If anything, these managed future wholesalers should go "direct" in the food chain.

Spiff, in the context of my discussion about trying to get compensation to advisor, I believe you have drawn the wrong conclusion about C shares, and are fueling ignorance. At least, for smaller accounts. Another example of a b//d working things to their own (partners) advantage, and hoodwinking the advisors with Kool - Aid (not just the Jonestown kind).

What is the point of affiliating with a b/d if you are going to make a virtue out of selling A shares? Same with my comments about managed futures or active management, I'm sure they are appropriate in some situations and would not want to exclude them from consideration if the #s justified it.

But if you really want to drill down to the heart of it, what's the point of saying, " these C share 12b1 fees are bad, but A share 12b1s are okay?"

Or, this managed futures fund is a really cool idea with big potential, but it has a high expense ratio or load and pays a big trail to the advisor, but it's really unique.

Show me the no load managed or ETF version in wrap, or just use your b/d status to ignore costs and tell stories, but don't try to BS up the middle with talking about the virtuosity of rocking for catfish in muddy water versus night fishing for bass with surface lures in a crystal clear quarry.

Better yet, let's get rid of 12b1s and put brokers and RIAs under the same standard, and be done with all of this BS. Advisors will make more and stay in business longer, the public will be better served.

Feb 4, 2011 12:53 pm

It's not a virtue that I prefer A shares.  It's just math.  This guy put almost $300K into 4 different funds.  Not 4 fund families, BTW.  4 funds.  He was at about $90K with 3 of the 4.  My field supervision guy would have been on my phone the next morning asking me why I was avoiding breakpoints.  Never mind the utter lack of true diversification in the portfolio (40% Large Value, 40% Large Growth, 20% other(zero bonds for this retired client)) .  This $300K was a rollover.  It would have been a great time to introduce this client, who understands that we get paid for what we do, to a fee based account.  Like you said, the fees of the wrap account would have been less than the C shares he used.  If not the fee based account, why not add $10K to the totals going to the new fund families and hit the $100K breakpoint with A shares, saving the client tons of money in expenses over the rest of his life. 

I had to chuckle at the FA's decision making process.  He's a Wells Fargo guy and every time he gets together with this prospect he prints out an Envision report.  In that report is an outline of the current holdings vs the target holdings.  The client was already overweighted in Large Caps.  The recommended portfolio is a very well diversified portfolio that includes everything from short term fixed to emerging markets to REITs.  With this $300K guess how much of that money went into small caps, or emerging markets, or fixed income of any kind?  ZERO.  And the one fund, managed futures, isn't even in the recommendation.  Where did that come from?  What's the point of printing out a report that says one thing and then completely ignoring it?   

I haven't drawn the wrong conclusion about C shares.  I have a belief as to when and why they should be used.  A long term hold in a retirement account isn't, in my opinion, the correct place or time.   

Feb 4, 2011 1:36 pm

The underlying problem is that most products available to non-accredited investors in the managed futures space are sub-par.  I will be the first to admit as much. With the new accredited investor rules, it makes things even more difficult.

The rydex product, the new wisdom tree etf, etc., are all very similar and based off of the S&P DTI index.  What people dont realize is that you have to critically evaluate the system engineers behind these products first and foremost.  I can slap a Rydex label a box of crap, it would still be a box of crap.  It is the quality of the system designers/researchers vs. the fact they are easily investible should be the main factor as to whether or not you should recommend them to your clients.  While they might be "uncorrelated" at the end of the day I would venture to guess that they will provide very little value to ones portfolio.  Im sure bigfirepower will not disagree with me here. For example, I track 33 of the top trend based CTA's, the rydex/S&P DTI ranks near the bottom of every metric other than overall volatility.  (ie performance when S&P is down >3%; >5%; how well they hold up when trend followers struggle, risk/return, etc) (I am happy to send spread sheet to anybody interested)

To break it down a bit, pure trend following can be very inconsistant, can produce amazing returns, often when you need it the most, but also give back much of their gains thereafter.  The CTA's that have raised the most $ have learned to manage this, increase consistancy by incorporating additional strategies/time frames, evolved their risk management, etc.  Its also worth noting that the managed futures space involves many more strategies than trend following; these other strategies however tend to be less scalable and difficult to package or replicate into easy to access products. 

Feb 4, 2011 3:56 pm

Dav, show me some publicly available managed futures funds with long term track records, let's say 20 yrs, that have even a 5% rate of return over that time. Again, I'd bet money that on dollar weighted returns, the entire sector of managed futures has been a massive money loser for the last 20 yrs. And seriously, your point about retail vs accredited investor is a very poor reflection upon the industry/sector. Really, why on earth should that make a diff... 

Now, I'd agree that at certain points of the economic cycle, commodities and such can have value for certain investors, maybe even most investors at certain ponts of time. But, I have trust issues with the folks that run these things, that they both know what they are doing, and that they are honest and serving the needs of the customer over their own greed. I'm proven by the past, that my skeptical nature is MORE than warranted.

Dav, I'm successful and still in this biz because I've made a habit of putting my clients in front of me, and the firms i previously worked for. I'm a cynic, I'm a contrarian, and I'm always looking for what's wrong with something. That differentiates me from most reps that generally look at the bright side, take "the experts" word for it, and believe whatever a wholesalers says is gospel.  

Feb 4, 2011 7:47 pm

5 & 10 year number on Grant Park is 6% range net of fees. Who holds anything 20 years?

The 15 year # on Calamos Growth is something like 14% per year but the average investor return is like 3%. A share/C share, managed futures/etf - investors buy and sell stuff at the wrong time more often than not. That's the bigger issue in my experience.

I love C shares by the way.

Feb 8, 2011 12:41 pm

Effective at managing some volatility.

Mar 16, 2011 8:44 am

Millburn Ridgefield Corp. 33 yr track record, 19% average annual, 4 negative years (worst -9% in 1986) +23% in 2008, +29% in 2002, +16% in 2000

Dav, show me some publicly available managed futures funds with long term track records, let's say 20 yrs, that have even a 5% rate of return over that time. Again, I'd bet money that on dollar weighted returns, the entire sector of managed futures has been a massive money loser for the last 20 yrs. And seriously, your point about retail vs accredited investor is a very poor reflection upon the industry/sector. Really, why on earth should that make a diff... 

Now, I'd agree that at certain points of the economic cycle, commodities and such can have value for certain investors, maybe even most investors at certain ponts of time. But, I have trust issues with the folks that run these things, that they both know what they are doing, and that they are honest and serving the needs of the customer over their own greed. I'm proven by the past, that my skeptical nature is MORE than warranted.

Dav, I'm successful and still in this biz because I've made a habit of putting my clients in front of me, and the firms i previously worked for. I'm a cynic, I'm a contrarian, and I'm always looking for what's wrong with something. That differentiates me from most reps that generally look at the bright side, take "the experts" word for it, and believe whatever a wholesalers says is gospel.  

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Apr 1, 2011 3:40 am

He is right about one thing...being in this business 40 years doesn't make you a good analyst, portfolio manager, stock picker, etc.  It just means you're a good salesman.

Oct 30, 2015 6:34 am

The term "managed futures" refers to a 30-year-old industry made up of professional money managers who are known as "commodity trading advisors" (CTAs). CTAs are required to register with the U.S. government's Commodity Futures Trading Commission (CFTC) before they can offer themselves to the public as money managers. CTAs are also required to go through an FBI deep background check, and provide rigorous disclosure documents (and independent audits of financial statements every year), which are reviewed by the National Futures Association (NFA), a self-regulatory watchdog organization.