Pop quiz: How many sub strategies are there within the managed futures space?
A. there’s just one managed futures strategy = trend following
B. who knows?
C. At least 6
Those who know the old trick of picking ‘C’ even if you don’t know the answer – take a bow. We classify 6 in our annual 2013 managed futures strategy review, and industry reporting database BarclayHedge breaks up its managed futures database into 6 categories as well (albeit 6 different ones than Attain). Add in a few one-off type strategies like stock index based, gold, or energy focused, and there’s at least 6 different types of managed futures strategies out there; all performing a bit differently as BarclayHedge reports in their annual look at the managed futures sub index performance (which we took the liberty of adding 2012 as a reference).
Source: BarclayHedge Sub Indices
(Disclaimer: Past performance is not necessarily indicative of future results)
We spent a good amount of time over the past year discussing the Ag markets, and for good reason as you can see – with Ag Traders beating out the rest of the Barclayhedge CTA sub Indices for the 2nd year in a row. They also managed to beat out those looking for commodity exposure via “long and wrong” commodity ETF’s for the third straight year.
Which got us to thinking… just what is the longer term performance between these three and what makes them different from each other? Good question – here’s the race between managed futures overall, the Ag Trader sub index, and the Dow Jones–UBS Commodity Index over the past 10 years. Wow! Managed Futures as an asset class are trailing the Ag Traders, and the commodity index itself is well below (and actually below where it was 10 years ago! – so much for the commodity supercycle.
So if the Ag Traders have been the best in managed futures two years running, and have been able to beat out the long and wrong commodity ETF’s for three years running – do they deserve more attention from managed futures investors and commodity allocations alike? Are they better than the systematic, multi-sector trend following programs managing billions of dollars in the managed futures space?
Well, to the first question – they are definitely worth your attention. A decade’s worth of outperformance should be ignored at your own risk [past performance is not necessarily indicative of future results]. Something is definitely going on there – from a sort of small manager premium (most have asset caps in the $100s of millions, keeping institutional investors out and the managers flexible) to a non-systematic premium (if everyone becomes a systematic program – is there value in being able to sit on the sidelines or switch your spots from a momentum player to a counter-trend, and so on).
As for the second question, of whether they are better than the billion dollar managers – better is probably too strong of a word to use… and doesn’t quite apply. The best term in our opinion would be ‘different’.
How are they different? Ag traders use a wide spectrum of strategies used by others in the managed futures space; from momentum, to discretionary, and even options. But they focus their efforts specifically on the Agriculture markets – loosely defined as those commodities which grow in the ground (Corn, Wheat, Soybeans, etc.) and the animals which feed off those grains (Cattle and Hogs). Curiously not included, are other grown in the ground commodities like Sugar, Cocoa, Coffee, and Cotton – which is likely explained by those markets being used more for sweets and clothes than food staples, or because they were traded out of New York instead of Chicago where most Ag Traders hail from.
Now, as many of you are already aware, Ag markets beat to their own drum, in a way, as they react and respond to unique circumstances. Just like stocks react to earnings or the jobs report numbers, Ag markets respond to crop reports coming from the USDA, winter storms affecting survival of the commodities, and news that a meat producer has stopped accepting Cattle with a certain growth hormone. But unlike traditional trend following managed futures programs – there is typically a human brain standing between these reports and generating a signal based off of the price action the reports cause.
That human brain usually rests inside the head (actually, it’s always inside the head…) of managers with decades of experience in not just their field – but also IN the field, out there running a combine or feeding the Hogs or tending to the catfish as the head of Ag Trader M6 Capital used to do. In our opinion, it is this human interaction with the data which makes Ag Traders special, and that human interaction which has been a big part of their success.
Will they outperform over the next 10 years? Part of us wants to say they will – just so traditional trend following managed futures prove us wrong and trounce the Ag Traders over the next 10 years. But only time will truly tell… commodity prices may start to rally higher, helping the ‘I only make money when prices rise’ commodity ETF’s or bonds & currencies may start trending like crazy, pushing overall managed futures higher. Either of those scenarios would likely push those investments higher in the return column for a period of time – and it is worth noting here that an Ag Trader will give you significant commodity exposure, yet doesn’t guarantee the upside if and when commodity prices rise. But the Ag Traders are likely to be the tortoise to the proverbial hare, with the Ag Trader usually much less volatile and with much less downside risk than the commodity index. [past performance is not necessarily indicative of future performance].