A funny thing happened while the financial world was falling apart in 2008 and 2009: Commodity trading advisors (CTAs) performed, and performed well. Granted, this isn’t a shock to the managed funds segment of our audience. But considering the harm caused by the MF Global and Peregrine failures, it’s a welcome reminder that performance matters, even when operations falter.
This month, Keith H. Black dissects the performance of the managed funds community (see “Diamonds during the rough”), showing that institutional investors really are paying attention to managed futures funds in a big way. Yes, performance during the 2008-2009 meltdown highlighted the non-correlation of this group compared to the usual suspect assets, but also, the liquidity provided by these funds allowed investors to get their money out even as other assets were locked up — that is another reason why institutions like the asset class. In short, managed futures funds stood up and faced the tidal wave while other assets, especially those swamped by the Lehman failure, would or could not.
As Black highlights, performance by managed futures funds between 2007-2009 was 17.2% (in 2008 alone it was 18.3%). Macro funds for the period were up 24.90%, but had a drawdown of -4.60% in 2008. It’s true that managed futures had a -6.6% loss in 2009, but the point is they performed when the world was flailing, they were liquid, and, as Black notes, counterparty risk was not an issue because these funds by and large trade on futures markets, i.e., regulated exchanges with clearinghouses.
Since that period, as a group CTAs haven’t performed as well because of the low volatility environment, but institutions still are investing. Although there always has been institutional interest, it has been inconsistent, and perhaps a 2008 was needed to show big investors the light. Since 2008, assets under management for CTAs have almost quadrupled, to $214 billion in 2012 from $63 billion in 2008. Systematic diversified macro funds almost doubled market share of the $2.25 trillion global hedge fund market during the same period.
Non-correlation during a crisis is a key reason for this new push by institutional investors, but another aspect is the over-the-counter (OTC) world keeps growing murkier and murkier, despite efforts to change that through Dodd-Frank. Counter party risk is growing in importance, and the “safety” of trading on a regulated exchange can add to an institution’s comfort level, which probably suffered during the Lehman debacle. And despite our doubts about the segregated funds system after MF Global and Peregrine, no funds at the exchanges were lost. The system worked, which is why regulators are pushing to move OTC onto a third-party clearinghouse system. As CBOE Executive Chairman Bill Brodsky says in our interview this month, (see “Lead-off man who played all leagues”), “Think about Lehman…biggest bankruptcy in U.S. history, and for the Merc clearing and [Options Clearing Corp.], it was almost a non-event, [despite] big Lehman positions.”
The futures and options industry has beat itself up since the MF Global failure, and that event was caused largely because of malfeasance at a brokerage level as well as a regulatory fumbles — it was not the futures and options industry itself. And as Brodsky, who has worked in all aspects of this business — securities, futures and options — notes, not only did “the Chicago model” educate the world on derivatives, it also worked when other systems failed. Institutions are seeing it on the managed futures scale. It’s time now for the industry to learn from past mistakes and move forward and relish its leadership in the global world of finance. A derivatives exchange that didn’t exist 15 years ago is buying the New York Stock Exchange. Enough said.