Why Have Managed Futures Strategies Underperformed Recently?

Why Have Managed Futures
Strategies Underperformed Recently?
Why Have Managed Futures Underperformed Recently?
Managed futures strategies have put in a stellar performance since their advent in early 1980s.
The chart below shows the outperformance of the managed futures industry as compared to the
S&P 500 since 1980.
(Managed Futures Index is the BarclayHedge BTOP 50 Index)
But, recent history has not been so good. After a stellar 2008, when the managed futures index
was up 13.5% and the S&P 500 dropped 38%, the managed futures index has lagged the S&P
500.
Managed
Futures S&P 500
2008 13.58% -38.28%
2009 -4.76% 23.49%
2010
6.40% 12.84%
2011 -4.25% -0.20%
2012 -1.87% 12.98%
Source: Yahoo Finance, BarclayHedge BTOP 50 Index
This is especially disconcerting because we have seen a whole slew of managed futures mutual
funds recently hit the market that are being sold to retail investors. Investors are concerned that
the strategy has lost its charm.
Please review Important Disclosures
www.macmllc.com
info@macmllc.com
Why Have Managed Futures
Strategies Underperformed Recently?
In this analysis we will show:
1. Long-term volatility has not dropped, but curve inversion has increased.
2. Most managed futures strategies have long-term holding periods.
3. Why there has been a drop in performance.
4. Investors should look at shorter holding period strategies like the MAMF Index.
Volatility Has Not Dropped, But the Returns Have
For our analysis, we created an index that contains commodities that represents most of the
commonly traded managed futures strategies. The index contains S&P500, Gold, Soybeans,
WTI, 10 Year Treasuries and the US Dollar Index. Then we looked at the cumulative absolute
move in this index, broken out by time frame, i.e. daily, weekly, monthly, quarterly and annual
moves.
Daily Weekly Monthly Quarterly
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
AVERAGE
1990-2000
2001-2005
2006-2012
195%
149%
163%
168%
142%
201%
218%
222%
228%
234%
233%
235%
232%
247%
214%
222%
228%
427%
316%
222%
255%
217%
84%
65%
76%
79%
67%
94%
103%
107%
113%
106%
106%
99%
109%
113%
102%
103%
104%
203%
141%
109%
117%
91%
38%
30%
37%
35%
31%
48%
47%
49%
52%
56%
42%
49%
52%
59%
48%
41%
52%
93%
62%
58%
59%
49%
Managed Futures
Annual
Returns
26%
19%
24%
22%
23%
31%
30%
29%
30%
28%
29%
26%
25%
38%
21%
27%
32%
61%
37%
36%
28%
25%
13%
6%
17%
14%
19%
15%
16%
17%
20%
8%
12%
23%
14%
15%
12%
17%
23%
26%
17%
18%
6%
11%
14.68%
2.55%
13.41%
-0.18%
14.02%
12.85%
11.96%
12.39%
1.63%
6.61%
3.85%
13.67%
15.52%
0.87%
2.40%
5.59%
7.58%
13.58%
-4.76%
6.40%
-4.25%
-1.87%
Daily Weekly Monthly Quarterly
192%
89%
42%
26%
232%
106%
50%
28%
270%
124%
59%
35%
Annual
15%
15%
17%
Returns
9.0%
7.3%
3.2%
(Managed Futures Returns are for the BarclayHedge BTOP 50 Index)
Please review Important Disclosures
www.macmllc.com
info@macmllc.com
Why Have Managed Futures
Strategies Underperformed Recently?
Cumulative absolute move is simply adding all the moves in the index over the specific time
frame. So, a 195% move in the daily index in 1991 means that the sum of the entire daily
moves in the index in 1991 was 195%.
For absolute return strategies that look to make money from both up and down moves, it is best
to look at cumulative moves to assess the strength of the market environment for that strategy.
1. The first conclusion that can be drawn from the above results is that the performance
has dropped, from an average of 9.0% per annum from 1990-2000, down to 3.2% from
2006 to 2012.
2. The second conclusion is that the total move in the index has not dropped, but increased
across all time frames. Therefore, the explanation often given by managers that a drop
in volatility is hurting performance is not borne out by the data as a whole.
Index Constituents Have Long Term Holding Periods
Next we looked at the correlation of the cumulative index moves to the managed futures returns
by time period.
Correlation of market moves by time frame to the managed futures index returns.
CORRELATION
Daily Weekly Monthly Quarterly Annual
1990-2000
-1%
-4%
-1%
34%
29%
2001-2005
2%
-29%
-8%
-40%
58%
2006-2012
37%
46%
44%
65%
82%
This correlation matrix has two clear trends:
1. The correlation of the annual moves is the highest to the managed futures returns,
showing that the most of the strategies in the index have long holding periods and are
influenced the most by long-term market indicators.
2. This correlation has increased over time. The correlation of the annual moves in the
index to the managed futures returns has gone from 29% in 1990-2000 to 82% over
the last 6 years. This can be attributed to a proliferation of long-term trend following
and momentum driven strategies in the managed futures index.
Please review Important Disclosures
www.macmllc.com
info@macmllc.com
Why Have Managed Futures
Strategies Underperformed Recently?
Short-Term Moves in the Index Have Increased More than Long-Term Moves (Volatility
Curve Inversion)
The table below shows the ratio of annual moves to quarterly and monthly moves in the index.
This once again has a clear trend:
Annual / Q Annual / M
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
AVERAGE
1990-2000
2001-2005
2006-2012
51%
31%
71%
65%
83%
47%
52%
57%
68%
30%
40%
87%
58%
39%
57%
60%
71%
42%
47%
51%
23%
46%
56%
56%
49%
Managed Futures
Returns
35%
20%
47%
41%
62%
30%
34%
34%
39%
15%
27%
47%
28%
26%
25%
40%
44%
28%
28%
32%
11%
23%
14.68%
2.55%
13.41%
-0.18%
14.02%
12.85%
11.96%
12.39%
1.63%
6.61%
3.85%
13.67%
15.52%
0.87%
2.40%
5.59%
7.58%
13.58%
-4.76%
6.40%
-4.25%
-1.87%
36%
30%
29%
Returns
9.0%
7.3%
3.2%
The curve is becoming more inverted over time. Meaning that the monthly and quarterly moves
have increased as compared to the annual moves.
Please review Important Disclosures
www.macmllc.com
info@macmllc.com
Why Have Managed Futures
Strategies Underperformed Recently?
This is the best explanation for why the managed futures index has underperformed in
recent years. We have already recognized the fact that most of the strategies in the managed
futures index are trend following type strategies with long-term holding periods.
But another thing to keep in mind is that most of these long-term holding period strategies have
risk management that is tied to shorter-term market moves.
As an example, a long-term trend following strategy might get its buy and sell signals based on
the 200 day moving average, but may still stop out and move to cash if there is a short term
adverse move in the underlying market. Therefore, as the size of the short term moves has
increased, the long-term trend following strategies have most likely hit their stop losses and
gone to cash quite often in recent times. But given the lower annual moves in the index, these
strategies have not been compensated while they have stayed in the market.
Therefore a drop in performance in the traditional long-term trend following strategies is
probably better explained by a relative pickup in the short-term volatility as compared to the
long-term moves in the market.
Solution - Access Shorter Holding Period Strategies
The important thing to understand is that just because the managed futures index has dropped
in performance does not mean that the managed futures industry as a whole has lost its charm.
The managed futures industry has grown beyond long-term trend following strategies into shortterm pattern recognition, volatility arbitrage and hybrid structures. These strategies are still few
in number and are not well represented in broad indices.
Also, they are not picked by most mutual funds that offer managed futures to the retail investor
which also explains the poor performance of the mutual funds in this space.
Short-term market volatility is high and is higher than it has been in the past. This is good for
strategies that trade often and have short holding periods. Also these strategies will not be
subject to being “chopped up” by short-term market moves, because they welcome short-term
market moves, given their short holding periods.
Here is an analysis of the MAMF Index that is a diverse index of 15 strategies. The index has:
■ Strategies across trend following, pattern recognition, arbitrage, neural networks and hybrid
structures.
■ Average holding period ranging between a few hours to a few days.
■ Dynamic allocation with monthly rebalancing across strategies ranging from 2.5% to 15%
capital per strategy.
Please review Important Disclosures
www.macmllc.com
info@macmllc.com
Why Have Managed Futures
Strategies Underperformed Recently?
Results
Managed
MAMF
Futures S&P 500
Index
2005
1.71%
3.01% 18.59%
2006
3.54% 13.74% 11.30%
2007
7.64%
3.24% 26.20%
2008 14.09% -38.28% 33.17%
2009 -0.10% 23.49% 13.29%
2010
7.05% 12.84% 15.52%
2011 -3.09% -0.20% 14.65%
2012 -1.35% 14.25%
6.24%
Source: Yahoo Finance, BarclayHedge BTOP 50 Index
■ The consequence of adding a diverse group of strategies that vary by holding period and style
results is a more consistent and superior performance when compared to the S&P500 or the
managed futures index.
CORRELATION Daily Weekly Monthly Quarterly Annual
2006-2012
64%
70%
71%
71%
72%
■ And the correlation to the market moves by time frame is consistent, which means that the
index is not dependent on any one time frame’s volatility and makes its performance more
robust across different market environments.
Please review Important Disclosures
www.macmllc.com
info@macmllc.com
Why Have Managed Futures
Strategies Underperformed Recently?
Important Disclosures
MA Capital Management is registered with the Commodity Futures Trading Commission (CFTC) as a
Commodity Trading Advisor (CTA) and as a Commodity Pool Operator (CPO) and is a member of the National
Futures Association (NFA). A subsidiary of MA Capital Management, MA Asset Management, LLC is an investment
advisor registered with the US Securities and Exchange Commission under the Investment Advisors Act of 1940. It
provides client portfolios. Additional information can be accessed directly from the ADV Document. MA Asset
Management operates an Internet investment adviser. MA Asset Management does not provide financial planning to
customers.
This brochure is solely for informational purposes. Presentations of back-tested performance are
hypothetical, were compiled after the end of the period advertised, and do not represent decisions made by MA
Capital Management during the period described. For actual results that are compared to an index, all material facts
relevant to the comparison are disclosed herein and reflect the deduction of advisory fees, brokerage and other
commissions and any other expenses paid by MA Capital Management's clients. Advisory services are only offered to
clients or prospective clients where MA Capital Management and its representatives are properly licensed or exempt
from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of
principal capital. No advice may be rendered by MA Capital Management unless a client service agreement is in
place.
All performance shown above is based on hypothetical results of executing our stated strategy across the
time frame shown, net of all fees and typical brokerage charges. Hypothetical performance results have many
inherent limitations, some of which are described below. No representation is being made that any account will or is
likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between
hypothetical performance results and the actual results subsequently achieved by any particular trading program.
One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of
hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can
completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to
adhere to a particular trading program in spite of trading losses are material points which can also adversely affect
actual trading results. There are numerous other factors related to the markets in general or to the implementation of
any specific trading program, which cannot be fully accounted for in the preparation of hypothetical performance
results and all of which can adversely affect actual trading results.
While MA Asset Management does provide investment advice to its clients, the content herein is provided as
general and impersonalized investment information and is not a recommendation or solicitation to buy or sell any
security. MA Asset Management does not guarantee or certify the quality, accuracy, completeness, or timeliness of
any content contained herein. It should not be assumed that any information discussed herein will prove to be
profitable or that decisions in the future will be profitable or provide similar results. Nothing in this report should be
construed as a solicitation or offer, or recommendation, to buy or sell any security, or as an offer by MA Asset
Management to provide advisory services. Investment management services are offered only pursuant to a written
Customer Agreement, which investors are urged to read and carefully consider in determining whether such
agreement is suitable for their individual facts and circumstances. The content of the report includes the commentary
by MA Capital Management and does not necessarily represent the opinions of MA Asset Management or any of its
officers, directors, employees or staff. For additional information or questions, please contact info@macmllc.com.
Current use of the S&P 500 Index and other domestic and international indices are intended for comparison
to general equity market behavior only. This benchmark may not be suitable for comparison to individual portfolios
with specific objectives, such as industry or security types.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. ALL INVESTMENT PORTFOLIOS
INVOLVE RISK AND MAY LOSE MONEY.
It should not be assumed that investors will experience positive returns in the future, if any, comparable to
those shown or that any or all of MA Asset Management’s customers experienced such returns. The information
shown is historic and should not be taken as any indication of future performance.
Please review Important Disclosures
www.macmllc.com
info@macmllc.com
Why Have Managed Futures
Strategies Underperformed Recently?
MA Asset Management believes that any third-party information that it uses on this Site comes from reliable
sources, but MA Asset Management does not guarantee the accuracy of that information. The data on the website
and newsletters have been prepared by MA Capital Management and have not been reviewed, compiled or audited
by an independent public accountant.
MA Asset Management, its affiliates and clients may invest or otherwise hold an interest in companies or
securities that are discussed in these materials. Recommendations that MA Asset Management makes in the future
may not result in the performance of the securities mentioned here, or even be profitable at all. The securities listed
may not represent all of the securities purchased, sold or recommended for the money manager's clients.
None of this information may be copied in any form, by any means, or redistributed, published, circulated or
commercially exploited in any manner without MA Capital Management’s prior written consent.
Copyright 2012 MA Capital Management LLC. All Rights Reserved.
Please review Important Disclosures
www.macmllc.com
info@macmllc.com