the Managed Futures mirage

[1prometheus]

I have had a habit of tracking CTA performance, and new CTAs in particular.

I have noticed a few problems with the managed futures industry:

(This is based only on my informal observation, I have not conducted a study.)

1. Money floods in just before performance tanks and losses rule. This is true for individual CTAs as well as CTA style types and even CTAs in general. I believe this effect is so significant that many funds with good long term paper records actually lose money for investors.

2. A Small funds look great. It attracts attention, assets balloon, and performance tanks. It is almost like the early performance is a "bate and switch" scheme to set up a large loss for investors.

3. The notion that managed futures are a good form of diversification is hopelessly clouded by survivorship bias.

So the question is: how to overcome this pattern in ones own ventures as a CTA.

Here are my ideas:

1. Take investors only to the extent required. Plan to grow your fund primarily through returns and results.

2. Do not chase random investors. Investors need to be screened just as they screen managers.

To the extent possible avoid "the managed futures industry". The industry seems to thrive by larding up managers with insane fees, pumping unstable investors into CTA programs, and in general costing investors untold millions of dollars.

Any other ideas??

 

[salvador90]

that's what happens as well on mutual funds... nothing new regarding to investors...

Even Peter Lynch which made around 35% a year when he was head of the Magellan fund, discovered that a great portion of his investors lost money.

That was due to the fact you mention... performance goes up, everyone rushes in to chase the performance... when it starts underperforming they get out.

Isn't it the same with markets in general?

 

[Biog]

Pretty good article on manager selection and measuring skill:

http://www.streetstories.com/rotd_13.html

 

[dandxg]

It's similar to March 09 in that you enter on when the market is down or fund is having draw down, not when it's up huge. Obviously, this works best if you have a longer time frame. Human psychology doesn't change same thing happened in housing market people that bought at the high got creamed.

 

[Chicago_CTA]

OP:

This is an interesting thread you have created. As an 'emerging' CTA I thought I'd share my insights on the matter.

Firstly, I would generally disagree that managed futures is a 'mirage' of sorts. From a universe of approximately 1,750 CTAs I suppose it's fair to state that an investor choosing a CTA at random may fare no better than choosing a commodity broker at random! That said, the industry is attractive, I think, because we allow prospective investors to view our track records, approaches and then compare what we offer to our competitors.

I'd like to touch on TWO topics:

#1: Scalability

When you write that some CTAs (or CPOs) do well and then attract big bucks, their performance subsequently suffers. This could be due to poor timing or adverse moves in the market; or possibly the CTA's program is NOT scalable. Scalability is crucial in going from $100k to $1mm to $10mm etc. But unfortunately it's not a question most investors will ask before hand.

So I'd think most prospective investors should invest time outside of reading D-Docs to get to know their prospective manager. He/She may be willing to share more about their ability to grow seamlessly (or not).

#2: Knowing your Manager

While I worked as a futures broker for some years, it later became my opinion that most people just SHOULD NOT be trading themselves. This is a tough game and 80% of people lose money over time.

**A great manager is one who's a great match for his/her clients' needs!** If a very wealthy person is looking for some fun and action, and likes the excitement, ambivalent whether they make money long-term, they should find a manager who takes big swings, etc.

For somebody who is conservative and favors smaller VAR, they should find a manager who trades LIKE THEY WISH THEY TRADED.


I'm a small fry, as far as CTAs are concerned (Hey, I'm emerging!), but I can tell you my clients include individuals I've known for years; people who are comfortable with my methods and risks involved.

Every CTA should invest time becoming better acquainted with his clients; every investor should get to know the person who's hopefully serving their interests.

With the ranking sites like BarclayHedge, Altegirs, Autumn Gold, etc., the CTA universe has become rather impersonal.

LET'S CHANGE THAT!

 

[1prometheus]

Some good replies thank you to all who responded.

I think the biggest source of losses for investors might be the structure of the industry itself, which does not really line up with having investor profits as a primary objective. (This might be completely justified in the broader sense of attracting speculators to the markets, yet I mention it because as a specific CTA, one has a different objective).

The industry is largely built on salesmanship, which nesesitates very high commissions and fees. This of course means the manager must take more risk in order to beat all the fees and transaction costs that the sales brokers lard up on top of programs.

Salesmanship is largely based on appealing to emotions such as greed, so the CTA has grown, yet will these investors yank their funds at exactly the wrong moment, like most do?


Not exactly a great business model if one wants to create a program that benefits investors. It could be said, "who cares" but to me that is part of the sickness of the financial sector.


For small or emerging CTA's, do you see an asset level at which you would close to new investors and grow through returns? If you look 20 yrs out I think this slow growth approach makes allot of sense.

One needs "sales" to reach a certain level that covers overhead, but beyond that the fund needs to justify itself by producing profits that can grow over time. With this type of business model the quality of investor is just as important as the quantity of funds they are willing to invest (at least above some certain level).

This also points to marketing and the need for alternative channels to find investors. I have read that warren buffet used to put on seminars and the like to find investors for his first hedge fund. Any other Direct marketing ideas for CTA programs?

I think there is a need for alternative methods of marketing programs to investors. The sales broker model seems to result in many problems.

 

[Rodney King]

Quote from Chicago_CTA:

Scalability is crucial in going from $100k to $1mm to $10mm etc. But unfortunately it's not a question most investors will ask before hand. So I'd think most prospective investors should invest time outside of reading D-Docs to get to know their prospective manager

Every institutional investor asks about scalability.

Every institutional investor "invests time outside of reading the D-Docs to get to know..."

If a very wealthy person is looking for some fun and action, and likes the excitement, ambivalent whether they make money long-term,

There aren't any such investors.

 

[Chicago_CTA]

Quote from Rodney King:

Every institutional investor asks about scalability.

Every institutional investor "invests time outside of reading the D-Docs to get to know..."

If a very wealthy person is looking for some fun and action, and likes the excitement, ambivalent whether they make money long-term,

There aren't any such investors.

Thanks for the heads-up, big shot. Like I said I'm emerging so my clients are accredited investors, for now, i.e. no pension funds, etc.

Regarding your second claim, you're wrong. You've probably never been a broker. There are a lot of gunslingers out there who frankly enjoy the emotional swings of trading on leverage.

Anything else to contribute, "Rodney King?"

 

[1prometheus]

Certainly Mr. King has much wisdom to share if he chooses too, and I think Chicago CTA's experiences are valid as well.

All perspectives are welcome.

 

[1prometheus]

Those who mentioned they are CTAs.

Are you interested in telling us about your business? How are you reaching out to customers? Are you using the "standard" channels? Are you doing any of your own marketing?

What type of program do you offer? What type of return profile are you targeting? How are you working towards your goals?