Taking the Loss- Trend-follower Style

One of our favorite bloggers, Barry Ritholtz, had a post up yesterday that struck a cord for us entitled, “Take the Loss.” While much of his commentary there related to the macroeconomic climate and the politics therein, the message of “taking the loss” crossed over into the realm of managed futures quite nicely.

The dominant strategy in the managed futures space is trend-following. It’s where managed futures started out, and the strategy you’ll see used by some of the biggest CTAs out there. Despite its prevalence and ability to attract assets, there’s one component to investing with a trend-follower that most can’t seem to wrap their minds around- I’m going to have more losers than winners.

Why in the world would you invest in something that loses more often than it wins? This ties back to a newsletter we wrote in 2010 on the Percent Profitable Fallacy. Yes, you may lose more frequently than you win, but in our experience, those wins are typically larger than the losses [Disclaimer: Past performance is not necessarily indicative of future results.] In this light, yes, trend-following investors are asked to take a loss more often than not, but in exchange, their wins are, typically, much more rewarding.

This stands in stark contrast to the “Too Big to Fail” banks, prop desks,  and option sellers of the world, where the model is to rack up as many wins as possible. The problem they face is that, because of the risk taken on in those trades, their losing trades are typically very, very big. Like, $2 Billion big. Sometimes.

Of course, there are no guarantees involved in selecting a trend-follower over an options seller or any other investment. Futures trading presents a risk of substantial losses, and no matter what strategy you go with, there’s always a chance that they’ll get caught on the wrong side of the market. However, in our opinion, the risk management involved in trend following mitigates some of that risk.

The key to investing with a trend-follower without losing your sanity is to put this uncomfortable loss into perspective. Keep in mind that taking the loss is part of the deal- the question is whether those losses are recouped by the wins you take along the way.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, 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.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, 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.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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