the Managed Futures mirage

Quote from 1prometheus:

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...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.
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Some thoughts:

1. Using CTA as a term represents all strategies -- when the reality is that many strategies can be very different. Best to talk about the strategy, not the regulatory term. And of course managed futures is quite possibly the worst term invented. The issue is the strategy, not the instrument.

2. Not all managers are created equal. Are some CTAs setup to make fees? Sure, but that motivation seems to apply to EVERY mutual fund. Do mutual funds benefit investors? Not exactly.

3. Good CTAs, using sound strategy, don't take "more risk" to beat fees. Really need to define the word 'risk' if you are going to use it.

4. Any broker selling anything works to appeal to investor greed, but that doesn't excuse the investor if he/she is an idiot. Investors, if behavioral finance is any insight, will always add/yank funds at the wrong time.
 
Michael,

Thank your for adding your thoughts to the discussion.

I would say I used the term CTA to refer to both a type of business as well as an industry, in the same way one could discuss the Restaurant industry without mentioning the specific cuisine being offered.

Certainly though strategy needs to be the core of a good CTA program, and by good I mean one that is offering value to investors.

The issue is: the industry model of developing a client base seems to have pitfalls: Larded-up programs and an unstable client base. New or growing CTAs may benefit from alternate methods of reaching out to and developing clients. It could be said, "who cares" and that viewpoint does have merit. However in my case my account as well as friends will be the largest initial investors, so I find this attitude troubling.

The obvious are:

Private networking/friends

Someone mentioned Fund of Funds to me in an email. Anyone have stories or insight on working with them? What type of fee cut or additional fees do they require? Are there certain ones that offer the best deal or have a good reputation?

I have heard a few CTAs that got started with a sub-allocation from a hedge fund. Is this similar to a FOF in terms of how it works? Anyone have experience here?

Direct marketing efforts: This is one I am considering.


on a different note:

Communication: I have recently reread the book that compiles Warren Buffett's annual reports. It is a terrific example of cultivating a loyal customer base. Whatever else one says about Mr. Buffett, he has a gift for communication. I see this as a critical element in developing a long-term oriented business

Any other thoughts from anyone?
 
Quote from 1prometheus:

I would say I used the term CTA to refer to both a type of business as well as an industry, in the same way one could discuss the Restaurant industry without mentioning the specific cuisine being offered.
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I hear you, but not on same page.

Fund managers are fund managers -- whether trading stocks as a mutual fund, CTA, hedge fund, etc. Beating clients over the head about fund management distinctions are a big part of the awareness/acceptance problem. The fund management industry, territorial for an assortment of reasons, likes the confusion.
 
Quote from Chicago_CTA:

Thanks for the heads-up, big shot.

Regarding your second claim, you're wrong.

Anything else to contribute, "Rodney King?"
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Wow! Luckily there are several books you can read to help you. http://amzn.to/bZgcw3

You're a young guy (I'm guessing), and your longevity will be much greater if you get rid of the anger and defensiveness.
 
I see Mr. King has offered up more of his Wisdom.

Would be happy to hear from others. Any new or "emerging" CTA's care to chime in?

Chicago, i would be interested in learning about the insights you gained on both the brokerage and CTA end of the business.
 
"Investors need to be screened just as they screen managers"

The ideal investor is one who is on board for the longer term and not going to yank funds on the first drawdown. They are not looking to "trade managers" but rather to invest with a manager.

That is how i see it.
 
I used to manage an LP as a CPO and currently run as a CTA. The pattern of chasing returns and bailing on drawdown became so predicitable I had to have one-on-one discussions with investors and put every new investor through a screening process. I rarely, RARELY came across an investor that wanted to invest money during a period of drawdown. A potential investor was interviewing me one day and after all was said and done he said, "call me when you have a 20% correction." My jaw almost hit the ground. I had my 20% correction and he dumped in a bunch of coin. He was the best performing investor that year.

I've concluded it's just human nature for investors to chase performance and avoid funds that are performing badly. This can be said for index funds as well. If utilities are down 30% on the year no one will touch it but if it's up 30% on the year the money will be flowing in. The same thing happens in managed futures.

Your dilemma is not an easy one to solve.

Quote from 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??
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There can be legitimate reasons for drawdown beyond the norm....20% might be a bit excessive...

Did the investor want to know what was behind the drawdown?



Where can I get a listing of CTAs and CPOs in Florida?


NiN
 
20 % is not excessive, it's the norm or even below the norm I think.

I have had the same impression as the OP regarding the long term performance of most CTA's.

Noone here talked about what academic research has long discovered in the world of mutual funds and hedge funds, there is little persistence in the performance of managers. In other words, if you are a good trader, you might just have been lucky.
I think I read in Market Wizards, that one thing you should ask yourself is the dollar amount earned by a manager for his clients. As a trader /CTA , your goal is to protect your clients' money (but the problem is you need to make a living too ) perhaps CTA's that suddenly gather more assets after a big run , "get the big head " or do not realize the role of luck in their previous performance. I think a trader should not only be aware of the role of luck but also of the cycles in the market. If you had a big run for two, three years, maybe you should become more conservative until you sense that the market is again perfect for your strategies.

Investors are not always wrong when shying away from funds in drawdowns, if you trade you know that losses are often followed by losses and gains by gains, same with funds bad years and good years tend to come in succession. Besides , you cannot apply the reasoning that a long DD is a buy signal to any strategy.
 
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