For most of this year we’ve been keeping tabs on the world of managed futures mutual funds. If you’ve seen any of our coverage, you’ll know that we’re not exactly fans. Turns out we’re not the only ones – recently a few readers sent us this article, a piece from Investment News slamming the mutual fund Grant Park Managed Futures Strategy for “hiding fees.”
In a major change, the fund has begun using swap agreements to access CTAs rather than having the CTAs manage a portion of the fund, Ms. Papagiannis said. By doing so, the fund no longer has to disclose many of the management and performance fees it pays.
Previously, the fund had accessed its underlying CTAs through separately managed accounts. Each account acted like an individual investor in the CTA, so it was charged an expense ratio and a performance fee.
Those fees were disclosed in its prospectus as underlying fund fees, and the maximum performance fee was noted in a footnote.
“They were disclosing it, now they’re hiding it,” Ms. Papagiannis said of the fees.
As much as we criticize managed futures mutual funds, this accusation rings hollow to us. First of all, when we covered managed futures mutual funds in our newsletter this March, we pointed out that many managed futures mutual funds were investing in underlying funds or wholly-owned subsidiaries, adding layers of complexity and (often) extra fees. But those underlying fees are reflected in the overall performance of the fund. It’s not as if Grant Park (or any other fund) is doing a bait and switch, where they sell investors on one set of fees then charge another, higher fee.
This doesn’t appear to be some nefarious scam, nor is it something pioneered by Grant Park. This is a response to a shifting regulatory landscape – and specifically, changes that may limit the amount of overall exposure a mutual fund can have via their controlled foreign corporation (CFC), and it’s something that other funds have already been doing for a while. As one commenter on the above article points out:
If you had done more research on this topic you would have found that a very large number of managed futures mutual funds use this exact method of accessing CTAs. Your article would have been much more powerful. Instead, you unfairly singled out a respectable name in the industry and implied they have cleverly found a way around paying fees.
We’re inclined to agree.
In fact, we heard rumors a while back that a prominent managed futures mutual fund operator not named Grant Park had received an SEC deficiency letter saying their method of skirting the rules to invest in futures markets was no good. We covered just how these fund companies get around the rules limiting futures market exposure in an old blog post noting that financial product innovation was alive and well. And supposedly the SEC letter said they would be looking into the companies which actually do the investing in the managed futures programs (the mutual fund then invests in those companies to skirt the rules), and considering the nominal amount of money traded pursuant to managed futures. A normal managed futures program has a nominal investment roughly 8 times the cash amount needed in the account, meaning these mutual fund companies formulas for adhering to the rules were now off by a factor of 8 or so.
Don’t get us wrong – we still don’t think mutual funds are the best vehicle for accessing the managed futures space, and now have another bone to pick with the introduction of counter-party risk and potential liquidity issues with swap agreements. If you have the capital to open a separately managed account, that is by far the most efficient means of accessing the diversification benefits managed futures can provide. But we find it strange that the author of this article chose to “expose” just one managed futures mutual fund for a practice that is, in reality, quite widespread and – if the rumors of the SEC letter are true – about to become standard practice.
This is part of why we expect managed futures mutual funds to underperform individually managed accounts. Whether the fees are printed in bold neon font at the top of the prospectus or buried in a footnote – or, as this article misleadingly alleges, hidden altogether – they’re still going to be a drag on performance. And that is far more likely to catch an investor’s eye.