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What Managed Futures Success Looks Like
April 12, 2011
We heard from a client recently who was down 4% in March and quite upset about it. Never mind that there was nearly a nuclear meltdown and multiple uprisings in the Middle East – this is an absolute return investment which should make money at all times was the gist of the comments from his end.
While we respect the viewpoint that managed futures, and indeed any absolute return type investment , CAN make money in any market environment, we respectfully reminded him that this does not mean they WILL make money in every market environment.
No investment, we told him, will mirror Bernie Madoff’s fund with positive returns month after month…unless it is a Bernie Madoff type of investment (or known by its more technical name, a scam). There is risk in managed futures just like anything else in life (especially investing), and there will be losing months, quarters, and years! The better investors understand that, the better their long term success with the investment, in our opinion.
All of this begged the question from our astute client – if losses and losing periods are part of the investment, how can I tell when a losing streak or period is outside of the norm?
Put another way - what does success look like? What can I expect from an investment into managed futures in general, and specific program types in particular, in terms of frequency of losses, time to recover, and so on.
Plain Language Expectations
So what does success look like? To get started, we came up with the following ‘plain language’ explanations of what we believe you should expect from the 7 categories of managed futures programs we track, and added the average stats for each category from our testing.
1. Systematic multi-market (long term) = small but frequent losing trades, outlier trades/months/years to upside, longer, drawn out drawdowns, short recoveries. Monthly Win% = 58%, Avg Up Month = +5.10%, Avg Down Month = +-3.92%
2. Discretionary – quiet times, no trades, then flurry of activity resulting in returns and drawdown periods coming in clusters, not consistently. Tough to pin to any one characteristic. Monthly Win% = 60%, Avg Up Month = +4.04%, Avg Down Month = -2.57%
3. Short term program = higher frequency trading, winners and losers cut short, winning trade percentage closer to 50%, shorter (and smaller) drawdowns than traditional programs, quick recovery periods. Monthly Win% = 63%, Avg Up Month = +3.58%, Avg Down Month = -2.93%
4. Option seller = more winning trades than losing trades, consistent monthly gains interrupted by quick, sharp outlier losses, slow crawl back to equity highs. Short drawdowns, long recovery. Monthly Win% = 70%, Avg Up Month = +4.90%, Avg Down Month = -5.99%
5. Spread program – flat to oscillating performance until/unless spread moves in desired direction, then possibility of outlier returns to upside. Monthly Win% = 61%, Avg Up Month = +6.58%, Avg Down Month = -4.07%
6. Stock index = somewhat of option profile, consistent gains offset by less frequent losing periods driven by extended moves in single direction in stock markets. Short drawdowns, short recoveries. Monthly Win% = 64%, Avg Up Month = +6.13%, Avg Down Month = -5.64%
7. Specialty (i.e. - gold program) = tied to their specialty market, can be slow, flat performance when ‘specialty’ market not moving, and outlier losses when ‘specialty’ market or trading approach has unexpected result. Monthly Win% = 57%, Avg Up Month = +5.03%, Avg Down Month = -4.58%
8. Overall = depends greatly on the skew of your portfolio- if skewed towards options, an option profile; if skewed towards systematic multi-market, that profile, etc. If balanced, higher monthly winning percentage, even mix of outlier winners and losers, shorter and smaller drawdown periods, quicker and steeper recovery periods. Monthly Win% = 62%, Avg Up Month = +4.94%, Avg Down Month = -4.52%
[As a quick aside, we can see that the average down month for all the programs in our test was -4.52%, or just about the same as the -4% loss which appeared out of the norm]
Instead of just saying what to expect, we thought perhaps it would be better to try and show it, by showing the meaningful statistics for each type of managed futures program in graphical format alongside one another, and in comparison to the broader universe of CTAs.
To create our statistics and graphs, we used the 97 CTAs on our expanded watchlist, which includes those programs on our recommended list, plus programs we have considered or are considering for inclusion on our recommended list, plus a library of 27 dead programs so as to avoid survivorship bias.
Finally, to remove instant history bias- which is seen in cases where a CTA has several months of data (usually positive) upon first posting its track record to the public- we removed the first 10% of returns for all programs.
So to see the above plain language explanations graphically, we created the following histograms showing the distribution of all of the monthly returns for each program within each category.
Past Performance is Not Necessarily Indicative of Future Results
Some telling patterns emerge in the histograms above, and we have listed some of the particular items of interest:
- the bunching of the discretionary returns around zero
- the large left hand “fat tail” of Options, as expected; and bunching of the rest of their returns to the right of zero
- the smaller tail risk of Short Term programs, as expected with their mantra of quick exits
- Specialty looking like a more ‘normal’ curve
- the large right hand “fat tail” of Systematic Multi-Market, as expected
- the large right hand “fat tail” of Spread traders, due mostly to Rosetta Capital
- the lack of bunching of Stock Index returns, which are well represented at nearly all levels
While the above can give a general feeling of what to expect in each of the categories, it doesn’t get into the nitty gritty of how large drawdowns CAN be, what the average time between equity highs is for each, the range of average annualized returns by category, and so on.
The graphs below lay out 8 different statistics across the seven different managed futures categories we track in order to gain perspective on how the different categories relate to each other. We have graphed each of the statistics using what we like to call a “slider” graph, which shows the range of values for all programs in each category. Each horizontal bar represents the spread between the minimum value and maximum value for each statistic, with the blue marker and corresponding numbers showing the average value for each category in each statistic.
You can see interesting patterns here as well, such as spread and short term programs low correlation with managed futures as an asset class (measured as an average of the three leading CTA indices – Barclay, Newedge, DJCS); the narrow range (6.5% to 22%) of average annualized rate of return for systematic multi-market programs, and options programs having the longest time between equity highs (at 17 months).
Past Performance is Not Necessarily Indicative of Future Results
Armed with these stats and graphs, we hope readers of our newsletter come away better informed as to what they can expect from their managed futures investment. As a prime example, the -4% loss seen by one of our clients in March was nearly the same as the average monthly loss (-4.52%) across 5721 months of data on 97 different managed futures programs, meaning it was nothing out of the ordinary at all. So if you are ever feeling that the investment isn’t living up to your expectations, check those expectations with the graphs and stats here. You may find that your expectations are off – not the program.
If the program is indeed off, check it against its benchmarks – both its category and managed futures overall. You can refer to Attain’s weekly Week-in-Review (bottom of every newsletter), to see if your investment is down in line with other programs of that type (e.x. it was a tough March for systematic multi-market programs), and check performance against managed futures as a whole daily by checking out Newedge’s CTA Index daily returns, or monthly on our blog when we post our asset class scorecard.
If your investment is consistently underperforming its category peers and overall benchmark (managed futures), it may be time to complain about that underperformance. If not, the losses are part of the investment and part of what you should expect. The losses, ironically, are part of what success looks like.
IMPORTANT RISK DISCLOSURE
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Uncertainty plagued the market last week. Conflict in Libya continued to push the energy sector higher. Concerns about a U.S. government shut down, potential U.S. fiscal policy shifts and ECB rate hikes made the investing climate unpredictable. Continued quakes in Japan undermined confidence in their recovery. The culmination of these factors led to market drops and heightened anxiety.
In the U.S., unexpected gains in retail sales created a slight bump to the market, though the gains were short-lived as confidence ebbed the closer a U.S. government shut down appeared. S&P 500 futures were down .29%, Dow futures down .09%, Nasdaq futures down .06%, Mid-Cap 400 futures down .84%, and Russell 2000 futures down .84%.
Metals were the go-to investment of the week, as gold and silver surged higher and higher. Gold finished the week at $1,474.10 after jumping 1% on Friday alone- an all time record. Silver rose an additonal 2.7% on Friday, to $40.61 an ounce- its highest price since early 1980. While these gains were certainly notable, even more remarkable was the closing of the silver to gold ratio to a 28 year low near 36:1, causing some to question whether the ascent of silver, in particular, was doomed for a just as rapid drop in the near future.
Food and grains saw a week of mixed results. The USDA Crop Report for April pushed corn up 4.35% to a 33 month high and Wheat up 5% on news of continued low stocks, though Soy was unable to capture the same benefit, dropping .10%. Coffee enjoyed gains of 5.51%, as well as Cotton at +3.79% and Orange Juice at +2.36%. Livestock, on the other hand, saw a dip from previous upward trends, with Live Cattle dropping 2.79% and Lean Hogs dropping 2.82%. Cocoa prices ignored continued violence in the Ivory Coast, the number one producer of cocoa in the world, dropping .86%. Sugar plummeted as export news from Thailand and India lessened concerns about supply.
As Portugal followed in the steps of Ireland and Greece in seeking a bailout and better than expected growth numbers came out of Germany, investors began to expect yet another ECB rate hike, leading to the Euro gaining 1.39% to a 14 month high, and the British Pound gaining 1.44% to a 15 month high. The U.S. Dollar, on the other hand, saw losses of 1.06% as investors speculated on whether or not inflationary pressures would lead to policy changes.
Last week we reported managed futures had faced one of its most challenging single months of performance since mid 2008… What a difference a week can make…
As if turning on a dime, multi-market strategies have sprinted out of the gate in the first week of April thanks to commodity markets continuing to make fresh 2011 highs (see our recent blog post). Leading the way has been the Covenant Capital Aggressive program, which has been long the precious metals since mid 2010, and more recently energy and grains; the program is ahead 4.85% so far this month. Not far behind Covenant is James River Capital Navigator which is ahead 3.10%. Both programs are considered much longer term than most other multi market managers. Other multi market estimates include: Hoffman Asset up 2.10%, Clarke Worldwide up 1.64%, Auctos Capital up 1.64%, Clarke Global Basic up 1.23%, Clarke Magnum up 1.16%, Blue Fin Capital up 1.01%, Robinson Langley up 0.78%, APA Strategic Diversification up 0.40%, Integrated Managed Futures up 0.11%, and Futures Truth MS4 up 0.02%. The only two programs that are in the red include APA Modified, down 0.15% and Dighton Capital, down 1.75%.
Short-term multi-market managers have had a mixed start to April after excellent performance in March. Quantum Leap Capital is currently leading the way in April at +4.80% after pushing ahead over 9% in March – great start to the year guys! Other positive short term manager estimates include: Bouchard Capital Short term at +1.10%, Dominion Capital at +0.98%, and Accela Capital at +0.62%. Currently we are seeing losses from the following managers: Mesirow Absolute Return at -0.27%, DMH at -0.32%, Mesirow Low Volatility at -0.33%, Futures Truth Sam 101 at -0.91%, and GT Capital at -1.77%.
Stock index traders are relatively flat thus far with Roe Capital Monticello up 0.07%, Roe Capital Jefferson down 0.17%, and Paskewitz down 0.33%.
Managed Forex strategy P/E Investments has been on fire since the middle of March and is currently ahead 2.53% in April.
After a strong showing last month, option trading managers are mixed here in April. HB Capital has jumped out to an early lead with an estimated 1.86% return. Other positive estimates include: Crescent Bay BVP at +1.47%, FCI CPP at +0.42%, FCI OSS at +0.18%, and Liberty Funds Group at +0.11%. Option managers who are currently behind include: ACE DCP at -0.07%, Crescent Bay PSI at -0.12%, White River Group at -0.14%, Clarity Capital at -0.17%, Bluenose Capital B1 at -0.24%, Cervino Diversified 1x at -0.42%, ACE SIPC at -0.62%, and Cervino Diversifed 2x at -0.68%.
Finally, specialty market managers are having a good April in the agriculture markets with Global Ag pushing ahead 4.77%, Rosetta up 4.44%, and Oak Investments up 2.77%. NDX is currently flat on the month. Gold specialists are also ahead and being led by AFB Forty Eighter up 2.91% and then Cervino Gold up 0.62%. Spread trading specialist, Emil Van Essen, is currently down for the month an estimated loss of 2.76% (for anyone tracking the equity curve on Emil looking for a potential entry point, the program is currently in a drawdown just over 5%). Lastly, Fixed income specialist 2100 Xenon is enjoying the sell off in the European bond markets, and is currently ahead an estimated 1.25%.
Swing systems produced mixed results last week, with some swing systems making profit while others were hurting. Day trading systems stayed quiet, with no systems executing any trades.
Moneybeans S lead the way amongst all swing trading systems. Trading soybeans futures contracts, it was able to make $2,872.50 last week alone. Its best trade was a trade it initiated on March 31st, when it got short and stayed that way through until exiting Wednesday morning for a profit of $1,871.78. Other positive results on the swing system side included Moneymaker ES up $27.50, Bam 90 M Squared up $119.92, Bam 90 Single Contract up $195.00, Bam 90 ES up $240.00, Kodiak ES up $332.50, and Polaris up $395.00.
On the down side last week was Strategic. It entered the week long and reversed short on Monday. On Tuesday, the equity markets opened up lower, but ended up moving higher as the day went on. As the market moved higher, Strategic’s stop got hit and it got out of the market. On Friday, Strategic got a bit unlucky as it got stopped out just in time for the market to move in its favor. For the week Strategic ES was down $302.50 and Strategic SP was down $1,875.00. Other negative results included AG Mechwarrior ES down $335.00 and August TD SF down $1,992.50.
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.