The problem with when a mainstream business media outlet writes about the futures industry is they usually get it wrong and unless someone from the industry responds, no one questions it. Worse, others pick up on the flawed story and repeats it without questioning it. This happened when, of all outlets, National Public Radio interviewed David Evans the author of the Bloomberg Oct. 7 story, “How Investors Lose 89 Percent of Gains from Futures Funds.”
Yesterday we pointed out how one industry veteran responded and today Attain Capital Management responded in its blog after being frozen out of the op ed page of nearly every major business media outlet. That is interesting, don’t you think? No one was willing to run a rebuttal to a pretty obviously biased and flawed story.
Perhaps Attain does not have the pull but it would be appropriate if someone with greater name recognition respond. Perhaps the Executive Chairman of CME Group should step up as it is CME customers being tarred here. The National Futures Association, representatives of which were interviewed for the story, sent a letter to the editor, which so far has not been published. In it NFA President Dan Roth writes, “The article…deliberately presents an inaccurate view of the managed futures industry. David Evans ignored all of the rules that ensure customers are given correct and current information about the fees… Although all of this information was given to Mr. Evans when he met with NFA staff, he chose to ignore the facts, take comments out of context and ultimately present an inaccurate view of the managed futures industry.”
I would like to see Bloomberg print this and they really should respond to it. I hope NFA sends this letter to NPR and all the major business media outlets.
The one question the NPR interviewer does ask regarding the difference of these products with high fee retail equity products was dodged by Evans. Both Dever in his response and Attain detail the broker dealer sales structure but Evans chose to keep the focus on managed futures.
Claims of a complicated non-transparent disclosure structure is a bit galling because it is due to the regulatory structure of many of these products, which come under the jurisdiction of the NFA, Commodity Futures Trading Commission, Securities and Exchange Commission, FINRA and depending on the product all 50 states. This regulatory structure is a big part of the reason why sophisticated investors are able to access managed futures without the higher fee structure after reading a relatively concise (usually around) 25-page disclosure document, whereas non-sophisticated retail investors must navigate their way through 500-page prospectuses. I have written many articles regarding this anomaly. If you are deemed non-sophisticated, you get the 500-page prospectus.
When I started covering the space more than a decade ago, a big issue was the multiple of regulations and regulators commodity pools faced. It was an issue for the Managed Funds Association but as that organization moved more towards representing large hedge funds, the problems of the managed futures world became less of a priority. The MFA’s main focus was to keep certain exemptions from registration for institutional managers so efforts to support managers offering retail products dropped to the bottom of their list. They were making the case that hedge funds only went to sophisticated investors so talking about the troubles of commodity pools would only muddle their message. So instead of finding a better way for retail traders to access alternatives, regulators — particularly on the securities side — just made it more cumbersome.
But a change in certain CFTC regulations in 2003 along with a desire to find ways retail investors could diversify their portfolio — especially after the debacle of 2008 — has led to the creation of managed futures mutual funds. Because many of these structures were straight managed futures the NFA and the CFTC felt they should play a role in regulating them and altered some of the previous exemptions putting them back under their control. The problem was some SEC rules conflict with CFTC rules so that some of these products necessarily would be in violation of one rule regime if there wasn’t harmonization between the two main regulators. Conflicts were mostly regarding how performance could be reported but harmonization has been accomplished.
This is a long way to get to the point that most of the issues regarding CPOs are due to regulatory overkill not a lack oversight. And one justification for the regulatory overkill is inaccurate and biased reporting on the managed futures space. It is simply a product of the lobbying power of certain industries that a long-only equity investment is viewed as more appropriate to retail than an investment that can be long or short in a half dozen asset classes, only one of which is equities.
Perhaps this gross example of bias can unmask this long held belief for the folly that it is and regulators can work on the appropriate structure for retail to invest in alternatives rather than protecting a favored group.