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Why you aren't getting Managed Futures exposure with Rydex and Wisdom Tree's Managed Futures products
February 28, 2011
We put the following out on our blog in early January (Wisdom Tree’s first ever Managed Futures ETF….WTF?), promising to follow up with a full newsletter on the subject.
We found it quite interesting that Wisdom Tree was trumpeting its release of a new ETF last week as the first ever managed futures ETF (you can find it on the middle/left/bottom of their home page www.wisdomtree.com), given that:
1. It doesn’t invest in ‘Managed Futures’ at all, and instead merely follows the S&P Diversified Trends Index.
2. Rydex launched a mutual fund – RYMFX (an ETF in all but name) four years earlier following the exact same methodology.
Well, here we are a few weeks later, and we’ve compiled the necessary statistics to delve into the issues surrounding these two so called managed futures offerings: Wisdom Tree’s Managed Futures ETF (WDTI) and Rydex’s Managed Futures Fund (RYMFX)
Most of our talk data will focus on Rydex’s offering, as it was launched in 2007 versus Wisdom Tree’s product just coming on line in January 2011; but it can be safe to assume, in our opinion, that Wisdom Tree’s product would have had the nearly the same performance over the past two years, as despite Wisdom Tree’s claim that they are the first managed futures ETF (technically correct as Rydex’s is a mutual fund) they both do the same thing, which is track the S&P Diversified Trends Indicator. In fact, since Wisdom Tree’s launch, the two have the exact same average daily gain at 0.03%, and a daily correlation of 0.88, with the Wisdom Tree product slightly ahead based on its lower expense ratio. You can see how closely they have tracked each other this year below:
If alarm bells are starting to go off already, congratulations – you are not one of the lemmings they are trying to attract with their product naming, having likely asked yourself: how does a managed futures tracking product accomplish its goal when it tracks not managed futures, but something else – the S&P Diversified Trends Indicator.
We’ll get to that question shortly, but the first order of business is to investigate just how well the “Managed Futures Mutual Fund” has tracked alongside a Managed Futures index. We’ll start by looking at the performance of Rydex’s Managed Futures Fund since its launch with that of what we would think should be its benchmark, the Newedge CTA Index.
Whoa – that isn’t very pretty, with the Newedge CTA (managed futures) index having outperformed the Rydex Managed Futures Fund by a factor of 3.5 since the fund’s inception. Perhaps the managed futures fund is less volatile, more consistent, or there is some other trade off for the underperformance? Nope, the CTA index is better across the board in all meaningful statistics – lower Max DD, higher Sharpe, more months profitable, and so on.
Now, we would normally be quite taken aback that more than $2.39 Billion worth of investors’ capital is paying Rydex 2% per year to underperform the managed futures benchmark by a factor of 8 on the return side, or a factor of nearly 3 on the risk side… BUT with $1.8 Billion worth of ‘dumb money’ trying to track Crude Oil prices with the infamously inaccurate Crude ETF USO (see our blog post on the problems with USO), nothing quite surprises us anymore.
So how can the smart folks at Rydex - and soon to be Wisdom Tree - be so far off from what the investment is supposed to do? The answer is easy… you see, despite the name – the Managed Futures Fund is not trying to track managed futures as an asset class. Per the RYMFX prospectus: The Managed Futures Strategy Fund seeks to provide investment results that match the performance of a benchmark for measuring trends in the commodity and financial futures markets. The Fund’s current benchmark is the Standard & Poor’s Diversified Trends Indicator®
One sentence, that’s all they need to pull the old bait and switch on $2.39 Billion worth of investors. The Managed Futures Fund is not tracking any of the hundreds of professional CTA programs which manage over $266 Billion nor any of the 20 programs which make up the Newedge CTA index.
Instead of the likely to be very complicated path of screening, hiring, and allocating to actual managed futures programs and managers and having to pay them fees; Rydex chose to use a single indicator to replicate managed futures performance (although technically, again, they never claim in their prospectus that they are trying to do anything at all with managed futures).
And Rydex has been quite good at tracking the S&P Diversified Trends Indicator®, underperforming by an average of just 0.15% per month/1.75% annualized, which is actually below what would be expected underperformance with their 2.05% expense ratio.
The S&P Diversified Trends Indicator®
The S&P Diversified Trends Indicator® (DTI) is an investable long/short strategy that can benefit from trends (in either direction) in the global futures markets, consisting of 24 futures contracts, with a 50% weighting in financial futures and 50% weighting in commodities futures. S&P has a nice brochure laying out the methodology dated Jan. 2007 (click here) [it baffles me how these big companies don’t have enough workers to keep this stuff up to date]
The indicator was designed and is licensed to S&P by one “Trader Vic”… more formally known as Victor Sperandeo. Now, Trader Vic has had a tremendous trading career as far as we know, and we like the DTI for what it is – a single multi market trend following methodology. But it is just a single model developed by a single manager. Conversely, the Newedge CTA index is comprised of 20 separate managers across which there may be in excess of 100-500 different models active at any one time (single Newedge component QIM claims to have traded 800-5000 separate models in their history) And while the DTI is well represented across commodity and financial markets with 24 different markets – compare that with Transtrend who claims to trade over 300 different markets.
Now, if I were Rydex or Wisdom Tree right about now – I would point out that the two programs used for comparison above have minimum investment amounts in the 10s of millions, versus hundreds of dollars for their products. And they would have a point. But there is more to the managed futures space than heavyweights QIM and Transtrend, there are the Clarke Capitals, Rosetta, Dighton, Covenant and more - with affordable minimums from $1 Million all the way down to $50K.
So how did Rydex and Wisdom Tree settle upon the DTI as the instrument they chose to track? It seems like an odd choice when looking at the rolling 12 month correlation between the DTI and the leading CTA indices from December 2000 through March 2007 right before the launch, which averaged a pedestrian, as far as correlations go, 0.61 correlation coefficient.
Perhaps they fell for the same trap so many of us fall into – chasing returns. One look at the chart leading up to the 2007 launch of the Rydex managed futures fund makes it seem pretty likely this was one of the main decision points.
From its launch January 2004 through the eve of Rydex’s launch of the managed futures fund, the DTI was simply trouncing the Newedge CTA index, returning 31% to the CTA index’s 10% in a little over three years. It must have seemed like a no brainer to tie their managed futures fund to this indicator, seeing as how the indicator was outperforming the benchmark handily. But things look a bit different since the Rydex launch, with the chart below showing the CTA index up 29% versus RYMFX up only 9% over the past 4+ years.
Was the DTI curve fit before going live? Or did the ultra high volatility in 2007 and 2008 expose some oversight in the DTI’s construction? Both of these questions are likely NO answers. For one, the DTI was initially launched in January 2004, a full three years before Rydex started tracking it.
The more likely explanation as to what has happened over the past three years is the fact that the DTI is a passive index, versus the managed futures index being comprised of programs that are actively managed by professionals. With the DTI only adjusting positions and trade direction on a monthly basis, from what we understand, you can see how some of the historically high volatility in 2008 could have caused lengthy, and costly, delays in getting in or out of positions. Conversely, actively managed programs are crunching data minute by minute and able to act on that data.
This is born out in the data when looking at the performance of the DTI and the Dow Jones Credit Suisse Managed Futures Index (used here due to its longer history) during the past five major market crisis periods where volatility spiked.
The managed futures index outperforms the DTI in each of the crisis periods by an average of 4.7%, despite underperforming the DTI across the entire period by about -1% per year (7.06% average annualized rate of return versus 8.03%), and we attribute that to the managed futures index being actively managed versus the passive nature of the DTI.
Another possible factor - the DTI doesn’t go short energy contracts, it only holds long or goes flat in energy markets. With energy prices having trended down as much as they have trended up over the past three years, this decision to only tackle the long side appears to have cost the DTI some performance. And finally, the DTI is just a single model versus dozens of programs in the CTA indices comprising hundreds of models. Could it be that the power of diversification won out?
The choice of the DTI indicator probably had more to do with ease of execution and operation rather than the above performance (although it is doubtful they would have proceeded if the two charts above were flipped, with the DTI underperforming the CTA index leading up to the Rydex launch).
After all, there are no managed futures futures. One can track stocks with emini S&P futures, oil with oil futures, corn with corn futures, and so on – but there is no such thing as managed futures futures which track managed futures.
So the choices are 1. to go through the costly process of screening, selecting, and allocating to multiple managers in a fund of funds approach which you hope will correlate highly with the managed futures index – having to deal with the paperwork of each manager, or a master fund structure, and the various layers of fees – or 2. Find something like the DTI which had performed in line with the managed futures indices (better than, in fact) and has at its core the same principles as most managed futures programs in so far as being multi-market, long volatility trend followers.
Wisdom Tree, like Rydex before them – chose the much easier path #2, enlisting the DTI to replicate managed futures performance, thereby eliminating the pesky problem of actually having to get real managed futures exposure. This is all fine and good, and you can see that the DTI has held up quite well during a very difficult period over the past three years. But if you are tracking the DTI, don’t let the marketing department pull a fast one by labeling the product ‘managed futures’. Call it a trend following mutual fund or the trend following ETF. Or better yet, the single multi-market trend following system ETF.
Perhaps true managed futures exposure is not available to those with less than $100,000 to invest in the space, and these products are as close as small retail investors can get. It is better than nothing, I will give them that. But isn’t it just a bit misleading to label products which have ZERO exposure to actual managed future programs with the names ‘Managed Futures Fund’ and ‘Managed Futures ETF’? Especially given their drastic underperformance to the managed futures index since launch…
IMPORTANT RISK DISCLOSURE
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Feature | Week In Review: Egypt/Libya send energy, grain, and metals prices on a wild ride - making for mixed results
Geo-political news from the Middle East and favorable economic news from many corners of the world continued to battle for the top headlines during February. The two events battled head on stoking high volatility which made for large price swings in most Commodity and Stock Index futures. Protest in Egypt got the ball rolling in the Mideast which ended a long reign of power and the contagion effect sprouted up demonstrations in several other countries most notably oil rich Libya which continues in a bloody battle between the current leadership and most citizens of the country.
The economic news from most fronts continued to strengthen ideas that sustainable growth is now a fixture with reports that some countries are considering moves to withdraw liquidity that was used to stimulate growth. Asia with the lead from China saw an uptick in interest rates along with increases in bank reserve requirements. The EC has also hinted at the same scenario especially with many Euro countries showing strong manufacturing and spending data in the past few months. Strong 4th Quarter earnings in the U.S. were also a source of optimism for the market place and in some instances led participants to garner ideas that inflation would be the next battle for several economies, especially emerging markets which have enjoyed strong growth year over year.
Overall, the headlines provided for double digit appreciation in many sectors for the month with Silver +19.97%, Cotton +17.19%, RBOB Gasoline +9.60% and Corn +9.10% standouts for their respective complexes.
The Food and Grain complex performed well in some sectors and lagged in others as worries of more riots due to supply shortages and Southern Hemisphere harvest pressure provided for a tug of war with regards to flows of capital. Coffee +10.20%, Cocoa +10.17% and OJ +3.93% all posted nice rallies. Laggards included Sugar -6.48%, Wheat -6.16%, Lean Hogs -5.53%, Soybeans -4.12% and Live Cattle -1.01%.
Most Energy complex issues found strong support from the turmoil in the Mideast, especially when battles erupted in oil rich Libya despite assurances from several OPEC producers that they would pick up any slack in supply if need be. Heating Oil +7.53% and Crude Oil +2.85% ended the month with a firm tone. Burdensome supplies and spreading continued to hamper Natural Gas -8.89%.
Market activity in the balance of the metals was rather mixed as headlines of inflation and spreading turmoil seemed to bring in flight to quality support for some while others were hampered by worries of how growth would be affected with the new events. Gold +5.65% eclipsed the key $1400 level followed by Copper +0.69% and Platinum +0.46%. Palladium -2.74% took a breather in February.
The Stock Index sector continued on the run of strong performance as constructive earnings and favorable economic reports trumped the Geo-political turmoil during February, although the violence in Libya late month did provide a speed bump to price activity. The move to new 2+ year highs was led Russell 2000 futures +5.47% followed by Mid-Cap 400 futures +4.64%, S&P 500 futures +3.41%, Dow futures +3.14% and NASDAQ futures +3.10%.
Currency activity for February reflected the change of risk appetite by many inventors as the turmoil in the Mideast and signs of tightening by the EU central bank led to a weak environment for the U.S. Dollar Index -1.21%. The balance of the complex experienced a decent rally with Swiss Franc +1.57% leading the pack followed by British Pound +1.51%, Euro +0.83% and Japanese Yen +0.30%.
Multi-Market traders wrapped up February with strong numbers despite many programs taking on water during last week’s volatility storm. The early estimates show that the top performing program was short-term trader Bouchard Capital, LLC at +10.40%. Bouchard was able to ride the volatility swings with precision and was one of the few managers to post a positive return last week. Coming in a close second and third were James River Navigator at +6.20% and Integrated Global Concentrated at +6.05%.
Other multi-market programs that are estimated to post positive returns in February include 2100 Xenon 2X +3.57%, Accela Short-Term +3.01%, Dominion Sapphire +2.57%, APA Modifed +2.57%, APA Strategic Diversification +2.26%, Quantum Leap +1.34%, DMH +1.02%, Dighton +0.36%, Robinson Langley +0.12%, and Futures Truth SAM 101 +0.06%.
Multi-market programs that appear to have finished down for the month include Mesirow Low Vol -0.22%, Mesirow Absolute Return -0.43%, Clarke Global Basic -0.23%, Clark Global Magnum -0.48%, Futures Truth MS4 -1.00%, Covenant Aggressive -1.25%, Clarke Worldwide -1.37%, Hoffman Asset -1.64%, and GT Capital -4.62%.
Short-term stock index traders were mixed for the month with Paskewitz 3X St. Index up +2.55% , while Roe Jefferson -1.81% and Roe Monticello -3.42%.
Foreign Currency trader P/E Investments was up +1.20% in February.
Option trading managers had been enjoying a relatively quiet month up until last week’s Libya debacle spooked the markets and caused for a sharp rise in volatility. Generally volatility expansion is not welcome news for option traders and that is reflected in current month estimates. Managers who are positive for the month include: FCI CPP +3.07%, Clarity Capital +0.92%, FCI OSS +0.58%, ACE SIPC +0.56%, Cervino Diversified 2x +0.07%, Crescent Bay BVP +0.05%, and Cervino Diversified 1x +0.02%. Option managers posting losses include: Crescent Bay PSI -0.82%, HB Capital -0.98%, ACE DCP -2.96%, White River -4.49%, and Liberty Funds Group -4.63%.
Specialty market manager performance was led, once again, by the agriculture traders while other categories were mixed. The top performer was NDX Shadrach (+8.07%) after a difficult January where the program lost -15.21%. Other agriculture trading results were as follows: Rosetta +4.47%, NDX Abednego +2.42%, Ocrant -0.74%, and Global Ag -0.86%. Gold specialist were mixed with Cervino Gold gaining +2.06% and AFG Forty Eighter losing -0.16%. Spread trading specialist Emil Van Essen was -4.0% on the month thanks to a reversal in the recent “contango” of the energy markets during the final days of the month (see our 2/24/11 blog post to learn more). Finally, fixed income specialist 2100 Xenon Fixed Income was down -0.46%.
Last month was a good month for most of the trading systems we track. Many of the systems started to participate in the uptrend in the equity future markets and were able to profit from the moves that were taking place. Systems that had struggled previously (i.e. UpperHand ES, Strategic) took big steps in the right direction by finishing with a positive P/L for the month.
The Strategic systems were able to post positive monthly P/Ls again this month. They entered the month of February long from 1280.50 and exited 24 points later near the high of the move. This was the largest profit for the month for Strategic and as the month went along it stayed fairly quiet and only made 2 more trades. For the month, Strategic ES made $1,360 and Strategic SP made $1,112.95. Other positive results were Bounce ERL up $20.00, Waugh Swing ES up $52.50, Polaris ES up $717.50, MoneyBeans S up $1,095.67, Waugh CTO ERL up $1,420.00, Bam 90 Single Contract ES up $1,576.63, Kodiak ES up $2,540.00, Bam 90 ES up $3,877.39, and Bam 90 M Squared ES up $6,781.25.
There were some systems that finished in the red last month. AG Mechwarrior ES made long trades for the majority of the month but was stuck buying the high and getting stopped out on the pullback. For example, on 2/22 AG Mechwarrior got long 2 points off the high and the market didn’t sustain that price level and began to go lower and stuck AG Mechwarrior with a 16 point loser. AG Mechwarrior ES lost -$1,518.75 for the month. Other negative results were MoneyMaker ES down -$114.09, Jaws US 400 down -$248.75, and Jaws US 60 down -$1,715.00.
On the day trading side PSI! ERL led the way, averaging $392.50 profit per trade. The biggest trade for PSI! ERL came on the First day of February when the mini Russell Market closed 10 points higher. During the day PSI! got long early on and almost immediately the market jumped up 12 points putting PSI! in an excellent position, it stayed long for the rest of the day and got out at the close. For the month PSI! ERL was up $1,570.00. Other positive results were Clipper ERL up $50.00, BounceMOC ERL up $460.00, Upperhand ES up $712.50, and BounceMOC EMD up $790.00.
Sadly, Waugh ERL was the only day trading system not able to post a profit this month. Overall, Waugh ERL didn’t trade poorly at all but it was hurt by a big losing trade it entered on the 24th. Waugh ERL got short near the low at 795.10 and the market immediately rallied against it and put Waugh ERL in a tough spot. It exited later on in the day and lost $900 on the trade. For the month Waugh ERL was down -$520.00.
IMPORTANT RISK DISCLOSURE
Futures based investments are often complex and can carry the risk of substantial losses. They are intended for sophisticated investors and are not suitable for everyone. The ability to withstand losses and to adhere to a particular trading program in spite of trading losses are material points which can adversely affect investor returns.
Past performance is not necessarily indicative of future results. The performance data for the various Commodity Trading Advisor ("CTA") and Managed Forex programs listed above are compiled from various sources, including Barclay Hedge, Attain Capital Management, LLC's ("Attain") own estimates of performance based on account managed by advisors on its books, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.
The dollar based performance data for the various trading systems listed above represent the actual profits and losses achieved on a single contract basis in client accounts, and are inclusive of a $50 per round turn commission ($30 per e-mini contracts). Except where noted, the gains/losses are for closed out trades. The actual percentage gains/losses experienced by investors will vary depending on many factors, including, but not limited to: starting account balances, market behavior, the duration and extent of investor's participation (whether or not all signals are taken) in the specified system and money management techniques. Because of this, actual percentage gains/losses experienced by investors may be materially different than the percentage gains/losses as presented on this website.
Please read carefully the CFTC required disclaimer regarding hypothetical results below.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN; IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK OF ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL WHICH CAN ADVERSELY AFFECT TRADING RESULTS.