There was a lot of talk at the New York CTA Expo this April on the need for rebranding of the managed futures space. I always cringe when such a solution is suggested because, in general, it always strikes me as a little disingenuous to blame marketing efforts instead of your product. How many times have you heard this as an excuse for something that just did not work? And, of course, this is not a new argument. For years people inside the managed futures industry have sought to repackage the product.
However, managed futures has worked and long-term trend-following has proven itself over several decades. Not to say that the industry hasn’t suffered with poor performance over the last few years, but it seems odd that so many so-called experts want to bury the strategy after every rough patch. Very few analysts say equity investing does not work anymore after a bear market.
It is true that the general public and business media do not understand the space, but to be honest, the industry didn’t always care to be understood. At some point the managed futures industry and the alternative investment industry as a whole had made a Faustian bargain of sorts by restricting its reach to high-net-worth investors in exchange for less onerous regulations. Regulators were worried about the risk involved in managed futures and hedge funds and the traditional investment world saw it (and see it) as competition, so it was in everyone’s interest to keep retail out.
The futures side often has had the worst of both worlds in being heavily regulated and still largely restricted from retail. And the paradigm that allows retail investors to gain access to long-only equity strategies — but not diversified long/short managed futures products — is not based on any underlying logic that I can see. It is just the way investments evolved over the years and was supported by the power structures of the various industries.
My favorite anecdote regarding this goes back about a decade with an emerging manager talking about his E-mini S&P 500 program. Shortly after the explosion of interest in interest in the E-mini S&P 500, traders took the next step by creating managed products based on trading the E-mini stock indexes. I asked this young emerging index trader whether his system could be applied to a diversified group of markets like, say corn, soybeans, etc. He replied that he would never consider trading anything as risky as soybeans. Really, he said that!
I recall telling this anecdote to Jim Rogers while interviewing him for his book “Hot Commodities” and seeing him become flabbergasted by an S&P trader thinking soybeans were too risky to trade. The point being certain products and strategies make it into the mainstream for certain reasons and those reasons often have nothing to do with whether those products or strategies are risky or appropriate for retail.
So yes, structures need to be created to offer managed futures to retail at a reasonable cost, but the industry needs to make the case that this is a product appropriate for retail. Lee Partridge (see “More bull less alts: Is history repeating?”) has created his own alternative 40-Act products as standalone investments as well as components of Salient’s custom portfolios. Partridge notes that managed futures works well in the 40-Act structure and has built his own systematic trend following model. Where he looks for outside expertise is with fundamental discretionary managers who provide added value through an information edge.
We noted back in March (see “Finding winners in a risk on/risk off world,” Futures, March 2014) how ag-based managers have performed well in recent years.
In “Commodities: It’s what’s for diversification,” we discuss the transformation in commodity investing from passive to active investing. It is really a return to where the industry started prior to the growth of financial futures, and the explosion of computing power allowed for the creation of diversified systematic models. Speaking of systematic models, Murray Ruggiero provides a history of system development (see “The long, winding tale of high-frequency systematic trading,”). It includes a sidebar by John Hill who built a business testing early trading systems.
The success of commodity based managers proves the diversification within the larger managed futures space and also that these markets remain vibrant. Look no further than our Markets feature (see “Big crop year expected: Will 2014 deliver,”) by Rich Nelson, and our Trading 101 feature (“Old crop/new crop fundamentals”) which looks at the fundamental outlook going into the growing season and opportunities trading grains spreads.
It looks to be an interesting growing season and the markets are providing numerous opportunities for traders to take risk. As long as that is true, managers will find new ways to exploit those opportunities and create alpha for investors.
That brings us back to the rebranding issue. The industry more or less has been a private club and what the general public knows about it has come from people who don’t really understand it and who are talking to folks who view it as a competitor. That is what has to change if the broader public is to gain the benefits of managed futures. Partridge points out that many pension investments may be repeating the mistakes made prior to 2008. No investor should go through another market crash wthout some allocation to non-correlated assets.
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