Bloomberg picks odd target in Campbell

October 25, 2013 12:27 AM
Blog first appeared in DanCollinsReport on Oct. 25, 2013

In my criticism of the extremely biased and poorly reported Bloomberg story on managed futures a couple of weeks ago there was one particular item (actually there are too many to list) that I wanted to follow-up on.

Bloomberg referenced Campbell & Company and its founder Keith Campbell, who recently received a Pinnacle lifetime achievement award this past June.

The story notes how Campbell’s Strategic Allocation Fund did well from 1994 through 2003 producing a  10.5% compounded annual rate of return (CAR) but then performance dipped. It then notes that the next decade it earned a CAR of 0.6%. But it didn’t compare it on an apples to apples basis, it calculated that 93% of gross profits went into fees.

I explained the folly of this in my first rebuttal. Calculating the percentage of gross profits eaten up by fees may reveal poor or flat performance but not the nature of fees. If a manager charges a flat fee of $10, it would consume 100% of profits if all he makes is $10 and 1% of profits if he makes $1,000. In either case fees didn’t change, performance did. It is a stupid metric to use. (What percentage of profits were eaten up by the 100 or so CTA programs that returned north of 50% (net of fees for managed accounts) in 2008?)

A look at Campbell’s core FME program (which I believe the fund invested in) for that period shows a CAR of 13.36%, which means the retail product with all its additional expenses and fees returned a little less than 3% than the institutional product charging 2 and 20.

During the more recent period cited the underperformance was closer to 2%.

The Bloomberg story then really goes off the tracks stating, “That compares with 7.1%, including dividends, for the S&P 500 during the same period."

As I mentioned previously, comparing a performance period to the S&Ps from the bottom of the 2000-2002 bear market makes no sense unless you are purposely making a one sided argument. And while the author writes the words regarding the goal of managed futures being a non-correlated investment strategy, he doesn’t seem to know what that means. It assumes investors have exposure to equities so to underperform or be relatively flat while stocks and doing very well is ok. It is kind of the point.

The S&P Total Return Index had a compound annual return of -14.55% from 2000-2002. The Campbell FME Large program had a CAR of 12.22% in that period. I am sure the retail product returned closer to 10%. The Barclay CTA Index had a CAR of 6.92% in that period. Managed futures did its job.

The reason I mention this is because I have a lot of respect for Campbell and Co. The period of time the story references, 2003, was significant for Campbell because they were doing so well. It was the height of an extremely positive performance period, and money was flowing in at a rapid pace. Not long after that, Campbell decided to raise its minimum investment level for its retail product from roughly $10,000 to $100,000. They did this not to restrict access to retail — they were one of the few managed futures firms to stick with its retail offering despite a heavy regulatory burden — they did it to ensure that the performance of their program would not degrade due to slippage or capacity issues.

As I mentioned, most of the managed futures space had given up on retail offerings; much easier to raise assets in chunks of $5 million than to maintain or make arrangements for a retail distribution channel. Campbell did this because they were producing tremendously positive returns and money was coming in extremely fast.

They chose to slow their asset raising to make sure all the additional money they were managing would not affect the performance for their existing customers. Think about that for a second; a money management firm chose to raise less money to protect customers.

Now it is true that is was a wise choice made also from self-interest because in the end if a huge increase of revenue hurt performance, it would be bad for the bottom line. And who knows it may have as assets continued to grow throughout the decade despite the change. But how many examples do we have from the last decade of anyone—especially in the world of money management—taking a long-term view. Taking steps to raise less money.

That is why it is particularly disturbing that Bloomberg would cite Campbell in its poorly reported, biased and shoddy piece on managed futures funds. We are living through a historic financial downturn due to the irresponsible creation and marketing of opaque over-the-counter investment products and Bloomberg attacks one of the most transparent and regulated products due to sales distribution channels that are not unique managed futures.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.