Tuesday, October 08, 2013

Insidious Managed Futures Funds' Fees

Here is a must-read Bloomberg article on the impact of fees on managed futures funds.  Here is an eye-popping passage:
During the decade ended in 2012, more than 30,000 investors entrusted Morgan Stanley with $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. The fund already had $341.6 million invested during the previous eight years.

Top fund managers speculated with that cash in a wide range of asset classes. In that period, the fund made $490.3 million in trading gains and money-market interest income.

Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns -- not one penny. Every bit of those profits -- and more -- was consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley.

After all of that was deducted, investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.’s 500 Index Fund, they would have reaped a net cumulative return of 96 percent in the same period.
But remember, this awful performance didn't correlate with the S&P 500, so it's OK and really not as bad as it looks.  Trust me, I have a black box.

And then there is this:
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.
The charm of managed futures funds is the top-secret algorithms and proprietary "black box" trading schemes touted by managers.   No one, apparently, is smart enough to understand what these managers are doing, so managers can't divulge information on their genius investment strategies. (What if a competitor were to somehow get the information?!?  The horror!!)  I had a friend in middle school whose favorite saying was "If you can't dazzle them with brilliance, baffle them with bullsh*&t."  The quote below shows that the black box nonsense is bunk, and that at least one managed-futures manager is clueless (or brutally honest) about its fancy formulas:
Like most managed-futures funds, Campbell develops algorithms for its black box. Those systems are flawed, Campbell tells investors in annual reports.

“A previously highly successful model often becomes outdated and inaccurate, sometimes without Campbell & Co. recognizing that fact before substantial losses are incurred,” the firm wrote. Keith Campbell, founder and chairman of the firm, declined to comment.
Oops. I may have a hard time spelling algorithm, but I do know how to play darts and pin the tail on the donkey.

This article is classic.  Managed futures had one shining moment in the sun - late in 2008 when the entire financial world nearly collapsed.  These funds have been scrambling since then trying to replicate their doomsday performance, and have been paid handsomely for their courageous efforts.

1 comment:

Anthony Garner said...

I have little respect for the sales tactics of fund managers be they of the traditional long only variety or hedge fund managers in general. There are a few out there that I rate highly but the vast majority offer junk for absurd fees. That said, investors are suckers for punishment and should get it through their thick heads that no investment strategy is without its severe ups and downs. I specialize in trading futures for myself on a trend following basis and might be considered by some to be an "expert". I am certainly as much of an expert as any CTA out there on the subject and in their defense I would say that these past few years have been an aberration for a strategy which has often given spectacular returns (at least at the gross level).

Please read the following which is one of many articles I have written about why times have been so difficult lately: http://tradersplace.net/forum/thread/44/trend-effi... The strategy will recover, have no doubt of that. And Hedge Fund fees while absurd for a simple strategy such as trend following are at least under attack and will doubtless be reduced as more and more CTA type funds sink without trace.

Don't make the mistake of condemning a strategy which is going through a bad time. Condemn investments banks and fund managers by all means for their greed. Most of them richly deserve it.