Bloomberg Takes Another Shot at Alternatives

December 15, 2013 11:30 PM
Blog first appeared in DanCollinsReport on Oct. 9, 2013

When a story comes out that is so slanted, so obviously part of an agenda — it is hard to know where to begin in responding to it. First off, let’s point out the obvious, Bloomberg Magazine appears to have reached a conclusion in its Oct. 7 story, “How Investors Lose 89 Percent of Gains from Futures Funds,” before it was even written.

Similar to the Bloomberg BusinessWeek story in July on Hedge funds, “Cover Trail: The Hedge Fund Myth,” it reveals an agenda as well as a lack of understanding of the industry it is covering.

For instance in the July story they go after the Securities and Exchange Commission (SEC) for allowing hedge funds to advertise even though that was done a year earlier with the passage of the JOBS Act. The SEC simply had to write rules and were a year late in doing so.

Here they point out how some public commodity pools have high fees and have underperformed over the last decade. However, they equate those fee levels with the entire $337 billion managed futures space not the subset of public commodity pools, who continue to get smaller because of an extremely high (not low) regulatory burden.

The story states, “In the $337 billion managed-futures market, return-robbing fees like those are common. According to data filed with the U.S. Securities and Exchange Commission and compiled by Bloomberg, 89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from Jan. 1, 2003, to Dec. 31, 2012.”

They reference 63 managed futures funds while the BarclayHedge CTA database lists more than 1100 managed futures programs.

Sol Waksman, President and founder of BarclayHedge who is quoted in the story says that the author obviously had an agenda. “He had an agenda and was looking to pull from what you said to buttress his argument.”

Waksman acknowledged that the fees charged by CPOs may be higher than the CTA programs he lists and that his CTA Index may not reflect those fees but BarclayHedge calculates a Commodity Trading Advisor (CTA) Index, not a CPO index and the majority of money invested in managed futures is with CTAs and not funds.

Even the title is tilted unnecessarily. The amount, 89%, of gains that goes to fees is relative. Execution and management fees will stay relatively stable so if you have flat to moderate returns those fees will be a higher percentage of gains. And by the why both actively managed and index based equity funds collect fees in poor performance years for equities.

And let’s look at the time frame chosen:  2003 to 2012. They chose to calculate this and compare it to equity funds from the bottom of a historic bear market to right around when equities made all-time highs. Hardly seems fair. In another part of the story it looks back four years. That covers 2009-2012, omitting 2008, a year equity markets imploded and managed futures programs soared. Managed futures were virtually the only investment strategy to perform well in 2008 and saved many portfolios from a disastrous performance. Why would an author choose to go back four years instead of five unless he was looking to match the numbers with a preordained point-of-view?

The story quotes some well-known futures industry figures who seem to be talking down their own products.

A quote from Gerald Corcoran, CEO of Chicago-based R.J. O’Brien & Associates LLC and a director of the Futures Industry Association seems to indicate that managed futures simply aren’t profitable.

It was an odd quote from Corcoran, who heads up the largest independent futures broker in the U.S., so I asked him about it and he expressed frustration that some of his comments were included without context. The discussion the reporter had with Gerry and another RJO executive included that Gerry has invested personally in managed futures for more than 15 years and believes they are a valuable component of a broader investment portfolio and an important portfolio diversifier.  He said that like all asset classes, managed futures are cyclical and are a long-term investment. He pointed out that there will be periods of time when performance will be down. He said that many managed futures investors like him benefited from managed futures in 2008 when other asset classes were down. As managed futures declined in recent years, a diverse portfolio still produced positive overall returns.

He also clarified comments related to retail suitability for managed futures. He said a retail investor should only invest in managed futures with sound advice from a registered investment professional and as part of a larger investment portfolio.

The story claims the RJO Global Trust managed futures partnership offered to retail investors at a $5,000 minimum charges 7.25%. That was not quite accurate, 7.25% represents the total break even cost for the investment, something I don’t think most equity based funds are required to do.

I did not discuss the article with all the sources cited but it is clear that the tone of the story was set before any interviews were conducted. Some fees are high and perhaps some of the new managed futures mutual funds will be a better way for retail investors to access managed futures, but it is clear that it confuses the fee structure of one group of products–funds–with managed futures in general.

One commenter from the article pointed out the difference, something the author did not distinguish: and actively managed traditional investment often have similar fee structures. It would be a shame if the story convinces investors to stay away from managed futures and we have another 2008. What would Bloomberg write then?

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.