Unimpressive category averages of "systematic trend" aka "managed futures", multialternatives, market neutral, etc.

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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nisiprius »

With regard to "this is just how you'd expect these things to perform during a bull market," a couple of points. First, I did not compare them to stocks, nor bonds, nor 60/40. The only reason I showed stock and bonds was to show what happens when you look at category averages instead of known-in-hindsight-good funds.

I compared them to money market mutual funds. I haven't heard anyone say that since 2008 we've been in a bull market for money market mutual funds!

Second, I didn't pick the start point, or at least I didn't try to. I tried to find the oldest mutual fund (I have not yet found out a way to search on inception date with an unpaid Morningstar subscription). The starting point was picked by the companies that decided to launch mutual funds. I was trying to approximate "all available data for mutual funds." Similarly, whatever can be said about Morningstar's categorizations, they were made by an independent, disinterested third party.

After considerable work, I can show the full range of data for a) the Credit Suisse Managed Futures Liquid Index, together with b) Morningstar's managed futures category average. What I find really striking about this is how, just before the start of the category average, the no-cost index shows a lovely, stable 11% annual return for more than a decade--and, just at the time they decided to launch mutual funds the index itself turns a corner, bends down sharply, and falls off the 11% line--while the category average is basically horizontal.

Madoff-like performance, that stops just as the mutual funds start.

Rorschach test. Does this mean this is actually a terrific asset class after all? Or does it suggest a mediocre asset class getting attention because of recent chance outperformance? Do we count on future mean reversion bringing it back to that 11%/year line? Or is it the leveling off itself that was the mean reversion?

Image

P.S. There is a "Credit Suisse Managed Futures Strategy Fund," CSIAX... but its inception date was 2012. Funny, that. It did a respectable job of following the index, impressive given its 1.30% expense ratio.
Last edited by nisiprius on Mon Apr 16, 2018 1:07 pm, edited 1 time in total.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by garlandwhizzer »

Nisi's post and its dramatic graph give excellent illustrations of "skating where the puck was." Our financial markets are very competitive and dominated by full time professionals who are constantly data mining in search of alpha. When past outperformance shows up, products to capture it proliferate and the alpha tends to diminish or disappear.

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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by lack_ey »

For managed futures in particular, I think crowding is a concern, and if you're looking at mutual funds then you're missing the bulk of AUM.

This article is over two years old but I think is informative:

https://www.rcmalternatives.com/2016/02 ... m-exactly/

The current figure from the source, BarclayHedge, shows $347 billion in managed futures strategies:

https://www.barclayhedge.com/research/i ... ement.html

These are among the many considerations you have to make looking at alternatives investments.

Anybody have a link to the Credit Suisse index methodology? Is the series backfilled or did it actually start in 1995? Obviously we have to be skeptical of backfilled results as strategies tend to be fit to the past data to look impressive, at least in part. That said, I think even plain-vanilla trend approaches should have done pretty well over that period without hindsight-bias cheating in terms of parameter and strategy tuning.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by HomerJ »

lack_ey wrote: Mon Apr 16, 2018 2:30 pmThese are among the many considerations you have to make looking at alternatives investments.
Is having many considerations to look at before investing in alt investments a pro or a con?
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by lack_ey »

HomerJ wrote: Mon Apr 16, 2018 2:38 pm
lack_ey wrote: Mon Apr 16, 2018 2:30 pmThese are among the many considerations you have to make looking at alternatives investments.
Is having many considerations to look at before investing in alt investments a pro or a con?
More work for the investor is generally bad, and juggling more things usually means more mistakes.

There are a lot of downsides to various types of alternatives even before you get to the usually significantly higher fees. We don't know that there are actually any benefits, but even supposing there are, they may not improve realized outcomes for any period we care about because returns are random. It can be a tough road, and a lot of the time you will look stupid following it.

Outside of perhaps some on the fringe, nobody wants to get rid of traditional asset classes for the long run. We all wish stock and bond returns will continue to the great, even remotely like past returns.

People focus too much on volatility and downside protection. The reality that long-term investors face is the possibility of a lot of assets not returning much of anything, and this needs to be weighted against the potential upsides and downsides of allocating to other baskets that may quite possibly be worse but might have a better shot under some futures, or other investment approaches.

All investing is ultimately speculative and uncertain. Prioritizing controlling on costs or complexity is reasonable enough, perhaps better. Some may rightly or wrongly look for other things.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by HomerJ »

lack_ey wrote: Mon Apr 16, 2018 2:51 pm
HomerJ wrote: Mon Apr 16, 2018 2:38 pm
lack_ey wrote: Mon Apr 16, 2018 2:30 pmThese are among the many considerations you have to make looking at alternatives investments.
Is having many considerations to look at before investing in alt investments a pro or a con?
More work for the investor is generally bad, and juggling more things usually means more mistakes.

There are a lot of downsides to various types of alternatives even before you get to the usually significantly higher fees. We don't know that there are actually any benefits, but even supposing there are, they may not improve realized outcomes for any period we care about because returns are random. It can be a tough road, and a lot of the time you will look stupid following it.

Outside of perhaps some on the fringe, nobody wants to get rid of traditional asset classes for the long run. We all wish stock and bond returns will continue to the great, even remotely like past returns.

People focus too much on volatility and downside protection. The reality that long-term investors face is the possibility of a lot of assets not returning much of anything, and this needs to be weighted against the potential upsides and downsides of allocating to other baskets that may quite possibly be worse but might have a better shot under some futures, or other investment approaches.

All investing is ultimately speculative and uncertain. Prioritizing controlling on costs or complexity is reasonable enough, perhaps better. Some may rightly or wrongly look for other things.
That is a excellent post lack_ey.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by NoRegret »

nisiprius wrote: Wed Apr 11, 2018 7:15 pm Low correlation? First things first. If your diversifier has less return than a money market mutual fund, it is going to drag down your return so much that it is almost impossible for any low correlation effect to offset it.
Excellent thread. I'm late to the conversation. You may find these two links interesting:

1. https://s3.amazonaws.com/static.content ... 0f17a7.pdf
2. https://www.rcmalternatives.com/2018/04 ... nto-a-bar/

The first paper from ThinkNewFound shows there're some nuances in asserting the lack of rebalance benefit simply because the return of the diversifying asset is low. The second just came to my attention today and I haven't thought through their calculations. But I found the results intriguing.

On a personal level, I'm a DIY investor and an unabashed market timer. I do my own hedging/leverage adjustment with minimal cost. For a static allocation, among the asset classes, I only have faith that gold will have near zero forward correlation with both stocks and bonds, and it doesn't have manager risk.

The raison d'etre of CTAs (commodity trading advisors, i.e. managed futures) has always been crisis alpha. In a large portfolio the portfolio manager farms pieces to various fund managers, one of which may be a CTA. I have always felt that hedging is best done at the portfolio level rather than the fund level. At a minimum the portfolio manager needs to make active adjustments, whereas a manager pursuing a static allocation is stuck. As a DIY market timer I face no such logical inconsistency.

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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nisiprius »

NoRegret wrote: Wed Apr 18, 2018 12:29 amExcellent thread. I'm late to the conversation. You may find these two links interesting:

1. https://s3.amazonaws.com/static.content ... 0f17a7.pdf
I don't find it interesting, I find it frustrating because I am 99.9% certain that it is just plain wrong. However, they don't give enough details to spot the problem, and anyway life is too short to spend it trying to winkle out the flaw in every perpetual motion machine. This stuff is as difficult to deal with as the Monty Hall puzzle, where no matter how hard you try, people flatly disbelief the correct answer.

I believe that anyone who thinks adding coin-flips to a portfolio can improve it is delusional.

I will state this as a mathematical fact--I actually have done the algebra on it and confirmed it by experiment because I don't necessarily trust my own algebra.

Over some specific time period, if you have
--a "main portfolio" with a Sharpe ratio of A, and
--a "diversifying asset" with a Sharpe ratio of B, and
--the two have a correlation of R,

then adding the diversifier to the portfolio will improve it if and only if R < min(A, B) / max (A, B).

In particular, a diversifier with zero correlation and zero return cannot improve the portfolio.

(A problem with trying to show this by simulations is that if you in fact simulate their COINX--"at the end of each month, a coin is flipped by the portfolio team. If the coin lands on heads, the investors earn a 3% return for the day. If it lands on tails, the investors receive a -3% return," when you really do it, over any stated time period, there will usually be quite a large positive or negative return. Furthermore, there will be a positive or negative chance correlation with other assets. That means that in an actual case, it will improve or hurt the portfolio depending on chance. They don't say how they handled this).
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nisiprius »

NoRegret wrote: Wed Apr 18, 2018 12:29 am...The raison d'etre of CTAs (commodity trading advisors, i.e. managed futures) has always been crisis alpha...
Well, look at the chart. Both the index and the category average existed in 2008-2009. What do you mean by "crisis alpha?" If you mean that they stayed level instead of plunging in 2008-2009, if that is "crisis alpha," then they showed it--but in that case bonds and cash also showed "crisis alpha" and they did it with less volatility and higher return, so why is the "crisis alpha" from managed futures preferable to the "crisis alpha" from bonds and cash?

Image
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by Theoretical »

nisiprius wrote: Wed Apr 18, 2018 7:16 am
NoRegret wrote: Wed Apr 18, 2018 12:29 am...The raison d'etre of CTAs (commodity trading advisors, i.e. managed futures) has always been crisis alpha...
Well, look at the chart. Both the index and the category average existed in 2008-2009. What do you mean by "crisis alpha?" If you mean that they stayed level instead of plunging in 2008-2009, if that is "crisis alpha," then they showed it--but in that case bonds and cash also showed "crisis alpha" and they did it with less volatility and higher return, so why is the "crisis alpha" from managed futures preferable to the "crisis alpha" from bonds and cash?

Image
The main reason is that they'd show that crisis alpha in an inflationary and rising rates environment at least as well as they did in the deflationary panic. Why?

2 reasons:

1. The collateral is typically invested in tbills or other ultrashort debt that's moderately correlated to inflation. If anything, the collateral was a drag in 2008 compared to how it would act in inflationary times.

2. In a 1970s scenario, the trend followers would be short US stocks, bonds, and the dollar, while being long foreign currencies and commodities.

In such a scenario cash has positive but mild returns and long bonds have very negative returns, especially on a real basis.


Edit: As an aside, one of the things I found a bit disappointing in Larry's new book on alternatives is that Managed Futures get very little weighting in the portfolio relative to the high tail risk lending, premia, reinsurance, and volatility funds, being weighted at only 20% of 25% instead of a lot more. It struck me as performance chasing and taking on some significant deep risk, especially for those taking from the bond allocation.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by not4me »

nisiprius wrote: Wed Apr 18, 2018 7:16 am
NoRegret wrote: Wed Apr 18, 2018 12:29 am...The raison d'etre of CTAs (commodity trading advisors, i.e. managed futures) has always been crisis alpha...
Well, look at the chart. Both the index and the category average existed in 2008-2009. What do you mean by "crisis alpha?" If you mean that they stayed level instead of plunging in 2008-2009, if that is "crisis alpha," then they showed it--but in that case bonds and cash also showed "crisis alpha" and they did it with less volatility and higher return, so why is the "crisis alpha" from managed futures preferable to the "crisis alpha" from bonds and cash?

Image
I find myself struggling to get the point. Soon after the thread began, I'd read over & felt there were way more holes than cheese to the methodology & didn't "get the point". Now coming back, there's more to read than I have time to, but it seems to get more & more obscure. So, let me walk thru an example of my confusion -- I'll stick with the managed futures.

I think you're saying "the no-cost index shows a lovely, stable 11% annual return for more than a decade" & then an industry arose to sell a new category of mutual funds to retail investors....should that surprise me? Then with something new, look at the average so that I include all those who would never make it....having seen other new products enter a market (financial or not), it isn't surprising to me that some didn't do that great & brought the average down, especially considering the next point....

I'm not an advocate for managed futures & perhaps my understanding is at fault. But, I would have expected them to be somewhat based on needing risk to "manage". Great timing to intro funds, but that is also a time when central banks around the world intervened & (imho) caused the pricing of risk to become distorted...thus, I would NOT expect managed futures to perform as "advertised"...that is, that would be a time when they'd be "out of favor".

So, what am I to conclude? course of action?
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nisiprius »

not4me wrote: Wed Apr 18, 2018 12:43 pm...So, what am I to conclude? course of action?...
In my case, my chosen course of action is:
  • Ignore "innovative" mutual funds that, for the first time, finally bring to retail investors strategies and asset classes, formerly available only to sophisticated wealthy investors, hedge funds, and institutional investors.
  • Ignore assets that aren't available as mutual funds, for the same reasons I don't invest in individual stocks, only more so. Beyond questions of diversification, these non-traditional assets are often subject to problems of low liquidity, less transparency, asymmetrical information, high transaction costs, wide bid-asked spreads, etc. I am not a "qualified" investor and I know it. The Investment Company Act of 1940 is my friend.
This isn't just managed futures. I don't have enough data to prove it, and I may have unconscious bias, but four different non-traditional assets--managed futures, commodities, multialternatives, market neutral strategies--all somehow managed to launch mutual funds just the exact moment when they were about to go out of favor. It almost looks like a pattern.

And, point that some seemed to misunderstand, I began by looking at category averages of stock and bond funds to show that they did OK despite including all the bad funds. You can't object to category averages unless you are confident that ordinary investors with reasonable diligence can reliably identify the good funds. On that theory, of course, we should all be using actively managed stock and bond funds.

So, this leads to a third course of action:
  • Before investing in a mutual fund in an unfamiliar asset category, check out the category averages, and think twice about categories that have performed poorly for the entire life of the category--unless you are truly convinced you know how to pick the good funds.
Last edited by nisiprius on Wed Apr 18, 2018 1:14 pm, edited 3 times in total.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by GAAP »

not4me wrote: Wed Apr 18, 2018 12:43 pm But, I would have expected them to be somewhat based on needing risk to "manage".
Maybe the only risk is a lack of new things to sell to suckers...
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nedsaid »

nisiprius wrote: Wed Apr 18, 2018 7:16 am
NoRegret wrote: Wed Apr 18, 2018 12:29 am...The raison d'etre of CTAs (commodity trading advisors, i.e. managed futures) has always been crisis alpha...
Well, look at the chart. Both the index and the category average existed in 2008-2009. What do you mean by "crisis alpha?" If you mean that they stayed level instead of plunging in 2008-2009, if that is "crisis alpha," then they showed it--but in that case bonds and cash also showed "crisis alpha" and they did it with less volatility and higher return, so why is the "crisis alpha" from managed futures preferable to the "crisis alpha" from bonds and cash?

Image
I might be wrong but I have two theories on what happened. First, was Peak China, my thought is that China's rates of economic were growth peaking right around 2008, just in time for the Beijing Olympics. As Chinese growth slowed, so did the formerly insatiable demand for commodities. Second, is the financialization of the Commodities Futures markets. People noticed the returns and a lot of institutional money flooded in, distorting, perhaps forever, these markets. I suppose you could say that the Bozos got in right at the time the Commodities market peaked. This happens too often to the retail investor.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by NoRegret »

nisiprius wrote: Wed Apr 18, 2018 7:16 am
NoRegret wrote: Wed Apr 18, 2018 12:29 am...The raison d'etre of CTAs (commodity trading advisors, i.e. managed futures) has always been crisis alpha...
Well, look at the chart. Both the index and the category average existed in 2008-2009. What do you mean by "crisis alpha?" If you mean that they stayed level instead of plunging in 2008-2009, if that is "crisis alpha," then they showed it--but in that case bonds and cash also showed "crisis alpha" and they did it with less volatility and higher return, so why is the "crisis alpha" from managed futures preferable to the "crisis alpha" from bonds and cash?
If you're willing to grant that managed futures can provide the same "crisis alpha" as cash and bonds then why not use them all? The question then becomes whether managed futures can beat cash and bonds during non-crisis periods and it's a much lower bar to clear.

I'm not a fan of managed futures and probably will never use them myself. The real questions to holders of stock/bond two-asset portfolios are: Will the negative correlation between stocks and bonds continue to hold? What's the plan if they both drop as in a stagflationary environment, or a currency/bond crisis? I don't think these are mere conjectures.

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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by HomerJ »

NoRegret wrote: Wed Apr 18, 2018 1:44 pmThe real questions to holders of stock/bond two-asset portfolios are: Will the negative correlation between stocks and bonds continue to hold? What's the plan if they both drop as in a stagflationary environment, or a currency/bond crisis?
Non-correlation isn't negative correlation.

Both could drop at the same time, but we'd expect bonds to drop less. In any case, the plan is to buy and hold, keep adding to our positions, and wait for the recovery.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by NoRegret »

HomerJ wrote: Wed Apr 18, 2018 1:51 pm
NoRegret wrote: Wed Apr 18, 2018 1:44 pmThe real questions to holders of stock/bond two-asset portfolios are: Will the negative correlation between stocks and bonds continue to hold? What's the plan if they both drop as in a stagflationary environment, or a currency/bond crisis?
Non-correlation isn't negative correlation.

Both could drop at the same time, but we'd expect bonds to drop less. In any case, the plan is to buy and hold, keep adding to our positions, and wait for the recovery.
What's the plan for someone in the withdrawal phase who thought bonds would protect them from a stock market decline and whose cash would be eroding in purchasing power? cf. the 1960's.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by HomerJ »

NoRegret wrote: Wed Apr 18, 2018 2:00 pm
HomerJ wrote: Wed Apr 18, 2018 1:51 pm
NoRegret wrote: Wed Apr 18, 2018 1:44 pmThe real questions to holders of stock/bond two-asset portfolios are: Will the negative correlation between stocks and bonds continue to hold? What's the plan if they both drop as in a stagflationary environment, or a currency/bond crisis?
Non-correlation isn't negative correlation.

Both could drop at the same time, but we'd expect bonds to drop less. In any case, the plan is to buy and hold, keep adding to our positions, and wait for the recovery.
What's the plan for someone in the withdrawal phase who thought bonds would protect them from a stock market decline and whose cash would be eroding in purchasing power? cf. the 1960's.
That's why we only pull 4%.

4% covers that worst case (so far worst case). 4% worked starting from most years in the 1960s (I think it was 3.8% for 1966, the worst year to retire in the past 100 years - luckily, more people had pensions back then).
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by lack_ey »

nisiprius wrote: Wed Apr 18, 2018 12:56 pm This isn't just managed futures. I don't have enough data to prove it, and I may have unconscious bias, but four different non-traditional assets--managed futures, commodities, multialternatives, market neutral strategies--all somehow managed to launch mutual funds just the exact moment when they were about to go out of favor. It almost looks like a pattern.
I don't think that timeline is right, at least not for alts in general or for all of those four categories, mostly because I'm not sure about prior performance being any good (outside of well-known outperformers).

With equity market neutral, what kind of returns do you expect? If you think long-only active funds are unlikely to generate alpha above costs as a group via stockpicking, how can equity market neutral funds operating on the same set of securities generate alpha via stockpicking when they're charging higher fees on average and have borrowing costs on the short side? This is only really possible if some stocks are identifiably so bad that most managers would want a weighting below 0, and the alpha generated from long-only funds underweighting these stocks to 0 pales in comparison with going short on these stocks (not coincidentally, to the extent that identifiably bad stocks exist, they tend to be very expensive to short). I guess it's possible, but I really wonder about returns on market neutral generally. I'm not convinced that they got worse after mutual funds launched; they probably just weren't that good to begin with, evaluated over many managers including the ones nobody knows about because reporting is spotty outside of mutual funds. I suppose they may have gotten worse along with long-only stockpicking getting worse.

It depends on the multialternatives and the strategies pursued but to some extent I think this applies there as well.

With managed futures I think you're overstating the case of performance differences by comparing (1) a (backfilled?) strategy index to (2) live fund returns and then not accounting for differences in cash return. Correct me if I'm wrong. For older live fund returns, check the BTOP50 (an average of a couple dozen funds in the space), which actually goes back to 1987. With the BTOP50, I see a return from 1998 through the end of 2007 as 3.4% annualized above cash. Cash return was 3.5% annualized.

Let me generate a quick graph.

Image

I guess it's kind of changed since 2007 or so? Maybe not? I don't think it's that obvious or drastic a change, anyhow, even if you look at the mutual fund category average rather than the BTOP50 over your evaluation window.

As for commodities futures, that has probably actually changed. I'll give you that one, though there's also bad luck involved with the past decade of returns (inflation below expected, etc. etc.)

nisiprius wrote: Wed Apr 18, 2018 12:56 pmAnd, point that some seemed to misunderstand, I began by looking at category averages of stock and bond funds to show that they did OK despite including all the bad funds. You can't object to category averages unless you are confident that ordinary investors with reasonable diligence can reliably identify the good funds. On that theory, of course, we should all be using actively managed stock and bond funds.
I still really object to evaluating fund category performance like that relative to cash rather than relative to cheaply available passive exposures. You should not give funds credit for market beta. As investments the stock and bond categories did terribly, worse than some of the alt categories you looked at.

As for category averages, we can almost assuredly do better over the long run than that, picking funds within a category. Screen on ER and you can already win for most categories, just not over a costless benchmark. What's unknown and up to debate is by how much, and that should vary by category. As I've been saying, in some categories, many funds are very identifiably different in exposures and characteristics, though of course realized outcomes will always be largely subject to luck. It's not like even stocks beat bonds reliably.

nedsaid wrote: Wed Apr 18, 2018 1:06 pm I might be wrong but I have two theories on what happened. First, was Peak China, my thought is that China's rates of economic were growth peaking right around 2008, just in time for the Beijing Olympics. As Chinese growth slowed, so did the formerly insatiable demand for commodities. Second, is the financialization of the Commodities Futures markets. People noticed the returns and a lot of institutional money flooded in, distorting, perhaps forever, these markets. I suppose you could say that the Bozos got in right at the time the Commodities market peaked. This happens too often to the retail investor.
I think that's relevant to understanding what happened to commodities (futures) funds. But I don't see how that directly relates to managed futures, which are not net long commodities futures. They're variously long and short a lot of different assets, including outside commodities, usually averaging about 0 exposure to each over a market cycle. To explain the performance you need to look at trend behaviors, as most primarily use trend-following signals.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by Texanbybirth »

nisiprius wrote: Wed Apr 18, 2018 12:56 pm
not4me wrote: Wed Apr 18, 2018 12:43 pm...So, what am I to conclude? course of action?...
In my case, my chosen course of action is:
  • Ignore "innovative" mutual funds that, for the first time, finally bring to retail investors strategies and asset classes, formerly available only to sophisticated wealthy investors, hedge funds, and institutional investors.
  • Ignore assets that aren't available as mutual funds, for the same reasons I don't invest in individual stocks, only more so. Beyond questions of diversification, these non-traditional assets are often subject to problems of low liquidity, less transparency, asymmetrical information, high transaction costs, wide bid-asked spreads, etc. I am not a "qualified" investor and I know it. The Investment Company Act of 1940 is my friend.
This isn't just managed futures. I don't have enough data to prove it, and I may have unconscious bias, but four different non-traditional assets--managed futures, commodities, multialternatives, market neutral strategies--all somehow managed to launch mutual funds just the exact moment when they were about to go out of favor. It almost looks like a pattern.

And, point that some seemed to misunderstand, I began by looking at category averages of stock and bond funds to show that they did OK despite including all the bad funds. You can't object to category averages unless you are confident that ordinary investors with reasonable diligence can reliably identify the good funds. On that theory, of course, we should all be using actively managed stock and bond funds.

So, this leads to a third course of action:
  • Before investing in a mutual fund in an unfamiliar asset category, check out the category averages, and think twice about categories that have performed poorly for the entire life of the category--unless you are truly convinced you know how to pick the good funds.
This is a great post.

I know it wasn't the only intended point of the OP; but it helped summarize the OP's thoughts in this thread for me, and it's probably the most important point.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nisiprius »

Lack_ey, I agree that the shape of the BTOP50 index looks more like some kind of continuous, smooth slowdown, not a corner at 2007.

I'm not quite sure what the BTOP50 Index is; these don't seem to be mutual funds:

AlphaGen Capital Limited (Long Short Agriculture Fund
AlphaSimplex Group, LLC (Managed Futures Composite)
AQR Capital Mgmt. (AQR Managed Futures MV Strategy)

And I don't know if the index is a theoretical index or whether it could be realized in practice in the real world. I've never heard of a mutual fund investing in hedge funds and I doubt it's possible.

By the way, since there are results through "April, 2018" I assume these are the beginnings months, not the ends of months, i.e. Jan 2018 = the total return obtained during the month of December, 2017. A month's shift shouldn't make much difference, but... what do you think?

Anyway, with a little work, I uploaded this into PortfolioVisualizer and am now ready to examine the question: if there had been a way to get the same returns as BTOP50--a low-cost BTOP50 index fund, say--would it have improved a traditional portfolio?

Portfolio 1 is 40% US Total Stock Market, 20% Global Ex-US Stock Market, 40% Total US Bond Market. Portfolio 2 is 32, 16, 32, and 20% BTOP50. The result is a considerable increase in Sharpe and Sortino ratios from adding BTOP50. But I'm always interested in "hold risk constant, take the improvement in return."

For Portfolio 3, I kept 20% BTOP50 and hand-adjusted the stock-bond allocation to bring the standard deviation close to equal to Portfolio 1. I ended up with 41.4% Total US Stocks, 20.7% Global Ex-US Stocks, 17.9% Total US Bonds, and, again, 20% BTOP50. There is an improvement of about 33 basis points in return, 0.33%, with no increase in standard deviation.

So, adding managed futures didn't hurt, and did produce a small improvement. It's not a very dramatic improvement, and In real life, I seriously doubt that those 33 basis points could be realized. Also, I won't display the results of "the opposite of cherry-picking" but if you shorten the length of the history, BTOP50 no longer produces any improvement.

Source

Image
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by Valuethinker »

nisiprius wrote: Wed Apr 18, 2018 3:52 pm Lack_ey, I agree that the shape of the BTOP50 index looks more like some kind of continuous, smooth slowdown, not a corner at 2007.

I'm not quite sure what the BTOP50 Index is; these don't seem to be mutual funds:

AlphaGen Capital Limited (Long Short Agriculture Fund
AlphaSimplex Group, LLC (Managed Futures Composite)
AQR Capital Mgmt. (AQR Managed Futures MV Strategy)

And I don't know if the index is a theoretical index or whether it could be realized in practice in the real world. I've never heard of a mutual fund investing in hedge funds and I doubt it's possible.
https://www.barclayhedge.com/research/indices/btop/
Barclay BTOP50 Index
The BTOP50 Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. The BTOP50 employs a top-down approach in selecting its constituents. The largest investable trading advisor programs, as measured by assets under management, are selected for inclusion in the BTOP50. In each calendar year the selected trading advisors represent, in aggregate, no less than 50% of the investable assets of the Barclay CTA Universe. To be included in the BTOP50, the following criteria must be met:

Program must be open for investment
Manager must be willing to provide us daily returns
Program must have at least two years of trading activity
Program's advisor must have at least three years of operating history
The BTOP50's portfolio will be equally weighted among the selected programs at the beginning of each calendar year and will be rebalanced annually.
For 2018 there are 20 funds in the Barclay BTOP50 Index. To see the complete list of constituents, scroll down o
Nothing to do with Barclays Bank and the indices it produces.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nisiprius »

Valuethinker wrote: Wed Apr 18, 2018 4:02 pm
Barclay BTOP50 Index
The BTOP50 Index seeks to replicate the overall composition of the managed futures industry with regard to trading style and overall market exposure. The BTOP50 employs a top-down approach in selecting its constituents. The largest investable trading advisor programs, as measured by assets under management, are selected for inclusion in the BTOP50. In each calendar year the selected trading advisors represent, in aggregate, no less than 50% of the investable assets of the Barclay CTA Universe. To be included in the BTOP50, the following criteria must be met:

Program must be open for investment
Manager must be willing to provide us daily returns
Program must have at least two years of trading activity
Program's advisor must have at least three years of operating history
The BTOP50's portfolio will be equally weighted among the selected programs at the beginning of each calendar year and will be rebalanced annually.
For 2018 there are 20 funds in the Barclay BTOP50 Index. To see the complete list of constituents, scroll down
Nothing to do with Barclays Bank and the indices it produces.
But what are those? What is an "advisor program?" Is that a fancy name for a hedge fund? In the real world could you created a mutual fund that invests equally in each of 20 hedge funds? How liquid are these "advisor programs" and how meaningful is it to tabulate an "index" if you can't actually liquidate your holdings in each of these twenty "advisor programs," at will, in any desired month? And are those returns net of expenses? You'd hope so, but why don't they say?
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by lack_ey »

nisiprius wrote: Wed Apr 18, 2018 4:05 pm But what are those? What is an "advisor program?" Is that a fancy name for a hedge fund? In the real world could you created a mutual fund that invests equally in each of 20 hedge funds? How liquid are these "advisor programs" and how meaningful is it to tabulate an "index" if you can't actually liquidate your holdings in each of these twenty "advisor programs," at will, in any desired month? And are those returns net of expenses? You'd hope so, but why don't they say?
The phrasing ("trading advisor programs") probably comes from the fact that historically these are known as commodity trading advisors (CTAs). Managed futures is maybe a more generic and broader term, probably more accurate as many trade more than just commodity futures. Many are still called CTAs but "managed futures" has increasingly become better known, I think.

They're looking at investment funds, whatever the structure. I think all those listed are not '40 Act mutual funds. There are various different institutional arrangements out there. You could call many of them hedge funds, though that's not a description of a legal structure either. Performance should be net of fees.

I think for many of these you could probably have monthly liquidity, if not better than that. After all, the underlying futures traded range from extremely to fairly liquid.These kinds of strategies are available as mutual funds, after all. For some, maybe not. Generally speaking, I think the performance over a given period is of interest (to understand the strategy and characteristics), whether you can liquidate on that timeframe or not.

The BTOP50 tracks investable (by institutions) funds, those accepting new money. If you were running a large pension fund, you could invest in all 20 of the funds covered.

There's not much particularly special about this index other than the fact that it goes back to 1987. I reference it for that reason. Well, it also may be a better representation of live-trading managed futures performance overall than the Morningstar category, based on the relative AUM covered.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nedsaid »

lack_ey wrote: Wed Apr 18, 2018 2:30 pm
nedsaid wrote: Wed Apr 18, 2018 1:06 pm I might be wrong but I have two theories on what happened. First, was Peak China, my thought is that China's rates of economic were growth peaking right around 2008, just in time for the Beijing Olympics. As Chinese growth slowed, so did the formerly insatiable demand for commodities. Second, is the financialization of the Commodities Futures markets. People noticed the returns and a lot of institutional money flooded in, distorting, perhaps forever, these markets. I suppose you could say that the Bozos got in right at the time the Commodities market peaked. This happens too often to the retail investor.
I think that's relevant to understanding what happened to commodities (futures) funds. But I don't see how that directly relates to managed futures, which are not net long commodities futures. They're variously long and short a lot of different assets, including outside commodities, usually averaging about 0 exposure to each over a market cycle. To explain the performance you need to look at trend behaviors, as most primarily use trend-following signals.
I read in Rick Ferri's book on asset allocation that the real return on commodities over long periods of time is a negative one percent a year. I figured this would make any commodities strategy an ultimate loser. Then someone pointed out, well that is true, but commodity futures have more stock-like returns. It was further explained to me that trading in the commodities themselves was one thing, trading in the futures was another thing altogether. It was here I learned about Backwardization and Contango, the commodity futures markets were at one time in Backwardization so Collateralized Commodity Futures could get a so-called roll return as spot prices were higher than futures prices. Pretty much, the strategy had an underlying return over time similar to stocks and thus made the chances of a CCF strategy succeeding very likely.

My understanding is that so much money flooded into these futures markets that commodity futures went into Contango, that is futures prices are higher than spot prices. So instead of having a positive rate of return built into a CCF strategy, you have a negative rate of return built in on top of the negative real return of the commodities themselves. So yes, a managed futures strategy could still work but that assumes you will actually have success with shorting strategies. More things have to go right now for the Managed Futures strategy to achieve positive returns.

Perhaps you could increase my understanding of how all this works. But it seems to me that now you have two weak links in the chain rather than just one. The weak links being negative real returns for the commodities themselves and Contango. So you have headwinds now and not tailwinds. Different from 2000-2008 when commodities themselves were in a bull market, and the futures markets in backwardization. You had two links in the chain that were strong and not weak and thus giving the Managed Futures strategy headwinds.

It sounds like the Managed Futures strategy is a momentum strategy as you mentioned trend following. This is all very interesting.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by lack_ey »

nedsaid wrote: Wed Apr 18, 2018 6:09 pm I read in Rick Ferri's book on asset allocation that the real return on commodities over long periods of time is a negative one percent a year. I figured this would make any commodities strategy an ultimate loser. Then someone pointed out, well that is true, but commodity futures have more stock-like returns. It was further explained to me that trading in the commodities themselves was one thing, trading in the futures was another thing altogether. It was here I learned about Backwardization and Contango, the commodity futures markets were at one time in Backwardization so Collateralized Commodity Futures could get a so-called roll return as spot prices were higher than futures prices. Pretty much, the strategy had an underlying return over time similar to stocks and thus made the chances of a CCF strategy succeeding very likely.

My understanding is that so much money flooded into these futures markets that commodity futures went into Contango, that is futures prices are higher than spot prices. So instead of having a positive rate of return built into a CCF strategy, you have a negative rate of return built in on top of the negative real return of the commodities themselves. So yes, a managed futures strategy could still work but that assumes you will actually have success with shorting strategies. More things have to go right now for the Managed Futures strategy to achieve positive returns.

Perhaps you could increase my understanding of how all this works. But it seems to me that now you have two weak links in the chain rather than just one. The weak links being negative real returns for the commodities themselves and Contango. So you have headwinds now and not tailwinds. Different from 2000-2008 when commodities themselves were in a bull market, and the futures markets in backwardization. You had two links in the chain that were strong and not weak and thus giving the Managed Futures strategy headwinds.
That's a bit of an oversimplification as even 20+ years ago different futures would variously change from being in backwardation and contango, generally at different times. Even today, many are in backwardation. The amount of backwardation vs. contango changes all the time.

Previously there was on average a bias to backwardation. Recently maybe more like the reverse. But that's overall, averaging. In any case, this is just one component of returns.

If investing in futures, you also get a return on all the collateral (all the otherwise uninvested cash, which you could put in short-term bonds or TIPS or whatever else). In theory the futures pricing reflects what the collateral return would be, but maybe not necessarily or all the time with these kinds of futures where storage is difficult and various arbitrage mechanisms that apply elsewhere don't really go into effect. In any case, this portion of the return used to be higher as well.
nedsaid wrote: Wed Apr 18, 2018 6:09 pmIt sounds like the Managed Futures strategy is a momentum strategy as you mentioned trend following. This is all very interesting.
Yes, that's the actual point. Everything we've been discussing about being net long commodities futures is not really that relevant, as managed futures strategies are not generally net long (at least not by much) commodities when averaged over time. They just go short futures contracts of whatever is going down, and go long whatever's going up. Some also look at signals other than trend, but largely it's about trend following.

It's a bit like you're telling me that stock valuations are high and I'm managing an equity market neutral fund. Okay, that matters to those who are long stocks. But if I'm long/short, then that just means I'm long expensive stocks and short expensive stocks. It doesn't seem to be that relevant in this case.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by longinvest »

A Futures Contract is a derivative involving a buyer and a seller who both pay a fee for the contract. After costs, it's a negative-sum game for the players as a group.

Playing a negative-sum game on top of a negative-return* asset is highly speculative. I fail to see any relation between that and the our investment philosophy.

* A commodity has no internal return, but it has storage costs.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by Waba »

longinvest wrote: Wed Apr 18, 2018 6:55 pm A Futures Contract is a derivative involving a buyer and a seller who both pay a fee for the contract. After costs, it's a negative-sum game for the players as a group.
But the group is not homogeneous. For example Oil producing companies use future contracts to secure a fixed price for a part of their future production so they can make sure they won't go out of business when the oil price suddenly drops. To them it's an insurance product and not an investment, it's reasonable to expect that there is a premium to collect for the counter-party that provides them that insurance.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nisiprius »

With regard to the nature of the BTOP50 index, I emailed BarclayHedge with some questions and received a reply saying:

--returns are net of fees

--the April return as of April 18 reflects an estimate of the Index return from April 1 - 17 based on the daily returns of he underlying funds.

--The advisors do have monthly liquidity. And yes, it is possible to do if you set it up properly.

(My third question was whether these programs have monthly liquidity, so that, if you had the wherewithal to actually invest in all of them, you could actually obtain the returns of the index).
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by VinhoVerde »

It is my contention that gold is a separate asset class from commodities or currencies. I communicate with an humble mini iPad and am unable to reproduce Nisiprius charts. Is anyone able to reproduce a 10 year chart with GLD versus VMMXX?
Thanks,
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by lack_ey »

VinhoVerde wrote: Thu Apr 19, 2018 9:57 am It is my contention that gold is a separate asset class from commodities or currencies. I communicate with an humble mini iPad and am unable to reproduce Nisiprius charts. Is anyone able to reproduce a 10 year chart with GLD versus VMMXX?
Thanks,
VinhoVerde
Image
http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

You only wanted 10 years?

Gold in some contexts is considered a hard commodity, in the same group as other mined materials. As an investment, given relative ease of storage, ability to own physical (or with a fund that owns physical) and avoid futures, etc. given the historical context and based on widespread usage across cultures, it's more of its own category, I suppose.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by VinhoVerde »

I am very appreciative, thanks.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by VinhoVerde »

Looking at the GLD vs VMMXX chart above, GLD, a ETF proxy for physical gold, is indeed a good diversifier for a stock/ bond portfolio and does outperform a month money market fund. In 2010-2011 the price almost doubled when it was widely believed that congress would allow the treasury to default on debt payments and S&P downgraded US bonds. It has declined since as the stock market has continued to strengthen and default less likely.
However,,it has strengthened 3.8% YTD while Vanguard Total Stock is down .6% and Total Bond down 1.4%. It does zig while stocks and bonds zag. It's the little gold alt engine that could. I use it as 10% of my portfolio.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by nisiprius »

So I thought I'd see how managed futures have been doing lately. They are sometimes said to show "crisis alpha:"
Although Managed Futures strategies have had the ability to outperform equity markets during past crises, for much of 2018 they suffered hand-in-hand with equity markets. For investors hoping for portfolio protection, this situation left them scratching their heads.... During sustained crisis periods, Managed Futures seem to earn their stripes garnering “crisis alpha...."
The author, Dr. Kathryn M. Kaminski, explains 2018 by asserting that it doesn't count because it was a "correction," not a "crisis." I don't know what March of 2020 was. But at any rate:

Source

Image

The blue line is the AQR Managed Futures Strategy Fund, AQMIX, which I used mostly in order to get Morningstar to display the category average for managed futures funds (orange).

The green line is three-month Treasury bills, which is--incomprehensibly to me--the stated benchmark for AQMIX. How can it possibly be fair to benchmark a fund with a standard deviation of 9%, and curve that looks like a torn newspaper, to a smooth-as-silk never-goes-down benchmark with a standard deviation of 0.24%? It is apples and ghost peppers.

The maroon line is a short-term Treasury fund, and the yellow line is Total Bond.

The dotted red line is at 3/23/2020, the low point of the stock market's 31% plunge. I certainly give credit to the Managed Futures funds for not plunging along with it, but neither did the bond funds.

It is noteworthy that since inception of AQMIX over ten years ago, the average Managed Futures fund has lost money. AQMIX average (CAGR) a bit under 1% per year and underperformed Treasury bills while having, of course, far more volatility.

The bond funds had both higher return and lower volatility than the Managed Futures fund.

And as for the vaunted "crisis alpha?" Looking around the red line, either there was none or it was hardly worth having in the light of everything that preceded it. Based on what has happened in the real world since managed futures mutual funds became available, there is no way I would want a managed futures fund when I can get a plain vanilla dumb old bond fund.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by JBTX »

nisiprius wrote: Tue Jun 23, 2020 7:48 pm So I thought I'd see how managed futures have been doing lately. They are sometimes said to show "crisis alpha:"
Although Managed Futures strategies have had the ability to outperform equity markets during past crises, for much of 2018 they suffered hand-in-hand with equity markets. For investors hoping for portfolio protection, this situation left them scratching their heads.... During sustained crisis periods, Managed Futures seem to earn their stripes garnering “crisis alpha...."
The author, Dr. Kathryn M. Kaminski, explains 2018 by asserting that it doesn't count because it was a "correction," not a "crisis." I don't know what March of 2020 was. But at any rate:

Source

Image

The blue line is the AQR Managed Futures Strategy Fund, AQMIX, which I used mostly in order to get Morningstar to display the category average for managed futures funds (orange).

The green line is three-month Treasury bills, which is--incomprehensibly to me--the stated benchmark for AQMIX. How can it possibly be fair to benchmark a fund with a standard deviation of 9%, and curve that looks like a torn newspaper, to a smooth-as-silk never-goes-down benchmark with a standard deviation of 0.24%? It is apples and ghost peppers.

The maroon line is a short-term Treasury fund, and the yellow line is Total Bond.

The dotted red line is at 3/23/2020, the low point of the stock market's 31% plunge. I certainly give credit to the Managed Futures funds for not plunging along with it, but neither did the bond funds.

It is noteworthy that since inception of AQMIX over ten years ago, the average Managed Futures fund has lost money. AQMIX average (CAGR) a bit under 1% per year and underperformed Treasury bills while having, of course, far more volatility.

The bond funds had both higher return and lower volatility than the Managed Futures fund.

And as for the vaunted "crisis alpha?" Looking around the red line, either there was none or it was hardly worth having in the light of everything that preceded it. Based on what has happened in the real world since managed futures mutual funds became available, there is no way I would want a managed futures fund when I can get a plain vanilla dumb old bond fund.

As to tbills as a benchmark, could it be that is where most of the money is actually invested? Futures are a leveraged instrument/contract, so the money doesn't go into the futures, it goes into the margin/collateral that backs up the futures. The logic could be that by comparing it to tbills you are looking at the excess or negative return of the futures vs the base collateral.

Thoughts?
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by Forester »

At this point the managed futures industry is hanging on, waiting for a commodity bull market to repair the track record. What if many of these markets never trended in the first place, it was a premium paid by hedgers to speculators and now the field is crowded.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by garlandwhizzer »

siamond wrote:

Thanks, Nisi, for bringing such hard facts to the table.

The more I look at historical data, the less I believe in the idea of *reliable* asset class diversifiers (besides the basic bond/stock split). It now seems to me much more important to learn to live with volatility, instead of trying to fight it teeth and nails. There are much more significant risks to consider when looking at a full retirement period, imho.
1+

Totally agree. Expensive underperformance masked as a high level sophistication--that is what managed futures, multi-alts, market neutral, etc, are IMO. Accepting volatility is hard emotionally, no doubt. It takes years to learn to tolerate it, but it is a worthy goal. Complex expensive strategies claiming very sophisticated approaches are usually losers for investors. Follow the money and you'll find it going from your pocket into the financial industry vault.

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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by BigJohn »

Forester wrote: Wed Jun 24, 2020 1:59 am At this point the managed futures industry is hanging on, waiting for a commodity bull market to repair the track record. What if many of these markets never trended in the first place, it was a premium paid by hedgers to speculators and now the field is crowded.
Maybe another example of what Bill Bernstein calls “skating where the puck was”?
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Post by Taylor Larimore »

Garland Whizzer wrote: Expensive underperformance masked as a high level sophistication--that is what managed futures, multi-alts, market neutral, etc, are IMO. Accepting volatility is hard emotionally, no doubt. It takes years to learn to tolerate it, but it is a worthy goal. Complex expensive strategies claiming very sophisticated approaches are usually losers for investors. Follow the money and you'll find it going from your pocket into the financial industry vault.
Garland:

The more I read your posts, the more I appreciate your important contributions to the Bogleheads Forum.

Thank you and best wishes.
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by cheapskate »

"Beware Geeks Bearing Gifts" very much applies in investing. The more distance the investor puts between herself and liquid-alts peddlers like AQR, the wealthier the investor gets.
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Re: Unimpressive category averages of systematic trend, multialternative, market neutral, etc.

Post by nisiprius »

I decided it was time to update the material on the performance of the funds Morningstar used to call "managed futures" funds and now calls "systematic trend" funds. All charts in this posting are based on calculations made from Morningstar data.

Morningstar's data for their "systematic trend" category average begins in 4/2007. Presumably this means there were funds in this category in 2007, although I wasn't able to identify any that old. Liquidated funds become inaccessible on the Morningstar website so that might be an explanation. But there are several funds with inception in 2010, such as the AQR Managed Futures fund, AQMIX (2/28/2010).

In any case, before 2007 it was difficult for a retail investor to invest in managed futures or systematic trend strategies, and in 2010 it became easy.

Credit Suisse has a Managed Futures index with inception in 1998. When I look at it I subjectively perceive that something happened around 2009 or 2010 or thereabouts. I plotted a trend line based the index data from 1998 through 4/2007 and it heightens my perception.

Image

Now we add Morningstar's category average for systematic trend mutual funds. The average systematic trend fund significantly underperformed the index.

Image

Finally, we compare the performance of the category average for systematic trend mutual funds with the category average for intermediate-term core bond funds. Note that this is apples-to-apples, category average to category average. During the time period when managed futures/systematic trend funds have been available, the average fund manager investing in intermediate-term bonds has done much better than the average futures manager investing in managed futures/systematic trends.

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MIretired
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Re: Unimpressive category averages of systematic trend, multialternative, market neutral, etc.

Post by MIretired »

This is an interesting post to suddenly pop up.
BJJ_GUY
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Re: Unimpressive category averages of managed futures, multialternative, market neutral, etc.

Post by BJJ_GUY »

JBTX wrote: Tue Jun 23, 2020 9:29 pm
As to tbills as a benchmark, could it be that is where most of the money is actually invested? Futures are a leveraged instrument/contract, so the money doesn't go into the futures, it goes into the margin/collateral that backs up the futures. The logic could be that by comparing it to tbills you are looking at the excess or negative return of the futures vs the base collateral.

Thoughts?
For several decades now it has been common, and even industry standard, to use T-Bills plus a certain premium as a longer-term benchmark for hedge fund strategies that are not structurally long beta as part of their typical portfolio.

So it makes sense to use T-bills + x% as a benchmark for a trend-following strategy, but I'm not sure it's exactly for the reasons you highlighted above. You're right about a managed futures fund holding a large % of AUM in cash/equivalents, but that doesn't mean the futures contracts (at notional value) don't represent the same economic exposure as owning the cash security the futures reference.

Just to clarify the point I'm trying to explain in the previous paragraph, consider an equity market neutral strategy that owns cash securities stocks only (no derivatives). If the fund owned the same amount long as it does short (and let's assume some attempt to be beta/factor neutral), then the correct benchmark for long-term assessment would also be T-bills +x%.

So, bottom line, in my opinion, t-bills is a reasonable long-term benchmark for managed futures, as you suggested, but it's not simply because futures are leveraged and a lot of cash is held back. Short-selling stocks have a similar profile where there is a t-bill component to returns, so not all that dissimilar to managed futures.
azanon
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Re: Unimpressive category averages of systematic trend, multialternative, market neutral, etc.

Post by azanon »

nisiprius wrote: Wed Oct 13, 2021 5:28 pm I decided it was time to update the material on the performance of the funds Morningstar used to call "managed futures" funds and now calls "systematic trend" funds. All charts in this posting are based on calculations made from Morningstar data.
I admit I haven't had time to read the entire thread, but I would just comment here, yeah of course a lot of the funds that fall in this category are not doing well. Namely, the "long-short" ones (aka market neutral), a lot of them are doing nothing more than trying to harvest the smart beta, the most popular ones being "value" and "small" To oversimplify, they go short growth and large, and long value and small. As most of us know, that's been the worst thing to do since 2009. Commodities have also been very bad during that time as well (but maybe finally picking up steam because inflation is finally coming back.

So for me, it's more just bad coincidence that the availability of the funds matched up with this time period of poor performance. I'd be careful not to read too much into that. And if you in any way have a belief in mean reversion, then, all things being equal, what you're pointing out could just as well be a bullish indicator for these funds going forward.
BJJ_GUY
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Re: Unimpressive category averages of systematic trend, multialternative, market neutral, etc.

Post by BJJ_GUY »

azanon wrote: Thu Oct 14, 2021 11:08 am
nisiprius wrote: Wed Oct 13, 2021 5:28 pm I decided it was time to update the material on the performance of the funds Morningstar used to call "managed futures" funds and now calls "systematic trend" funds. All charts in this posting are based on calculations made from Morningstar data.
I admit I haven't had time to read the entire thread, but I would just comment here, yeah of course a lot of the funds that fall in this category are not doing well. Namely, the "long-short" ones (aka market neutral), a lot of them are doing nothing more than trying to harvest the smart beta, the most popular ones being "value" and "small" To oversimplify, they go short growth and large, and long value and small. As most of us know, that's been the worst thing to do since 2009. Commodities have also been very bad during that time as well (but maybe finally picking up steam because inflation is finally coming back.

So for me, it's more just bad coincidence that the availability of the funds matched up with this time period of poor performance. I'd be careful not to read too much into that. And if you in any way have a belief in mean reversion, then, all things being equal, what you're pointing out could just as well be a bullish indicator for these funds going forward.
Even though your conclusion still ends up being applicable, it's probably worth clarifying the different strategies for the sake of better discussion here.

A market neutral fund like what you describe above would not be considered a systematic trend-following strategy. I have no idea what Morningstar's categories are, but I would guess they have an equity market neutral group that would be the fit for what you are talking about.

Systematic trend-following strategies are not market neutral. They trade across financial asset classes as well as commodities, and do so largely via futures (but may utilize other instruments as well). The perform better when there is a identifiable trend within each of the asset classes they trade, and the persistence of the trend is critical to their P&L potential. This type of strategy has always been very cyclical, and runs through multi-year spells of bad performance when there is a lot of whipsaw, or just range-bound price movements. Brief market dislocations like witnessed in 2018 are not really expected to be money makers, particularly for trend-following strategies that are mid-to-long term models (and it's not really realistic to expect short term strategies in mutual funds). medium and long term models need trends to persist to make decent returns.

Hope that helps clarify for some folks
azanon
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Re: Unimpressive category averages of systematic trend, multialternative, market neutral, etc.

Post by azanon »

BJJ_GUY wrote: Thu Oct 14, 2021 12:11 pm
azanon wrote: Thu Oct 14, 2021 11:08 am
nisiprius wrote: Wed Oct 13, 2021 5:28 pm I decided it was time to update the material on the performance of the funds Morningstar used to call "managed futures" funds and now calls "systematic trend" funds. All charts in this posting are based on calculations made from Morningstar data.
I admit I haven't had time to read the entire thread, but I would just comment here, yeah of course a lot of the funds that fall in this category are not doing well. Namely, the "long-short" ones (aka market neutral), a lot of them are doing nothing more than trying to harvest the smart beta, the most popular ones being "value" and "small" To oversimplify, they go short growth and large, and long value and small. As most of us know, that's been the worst thing to do since 2009. Commodities have also been very bad during that time as well (but maybe finally picking up steam because inflation is finally coming back.

So for me, it's more just bad coincidence that the availability of the funds matched up with this time period of poor performance. I'd be careful not to read too much into that. And if you in any way have a belief in mean reversion, then, all things being equal, what you're pointing out could just as well be a bullish indicator for these funds going forward.
Even though your conclusion still ends up being applicable, it's probably worth clarifying the different strategies for the sake of better discussion here.
Maybe so, but you'd need to let Nisiprius know that, not me, reference "multialternative and market neutral" in the actual subject of this thread. I'll pass on any ownership of that confusion.
BJJ_GUY
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Re: Unimpressive category averages of systematic trend, multialternative, market neutral, etc.

Post by BJJ_GUY »

azanon wrote: Thu Oct 14, 2021 12:27 pm
BJJ_GUY wrote: Thu Oct 14, 2021 12:11 pm
azanon wrote: Thu Oct 14, 2021 11:08 am
nisiprius wrote: Wed Oct 13, 2021 5:28 pm I decided it was time to update the material on the performance of the funds Morningstar used to call "managed futures" funds and now calls "systematic trend" funds. All charts in this posting are based on calculations made from Morningstar data.
I admit I haven't had time to read the entire thread, but I would just comment here, yeah of course a lot of the funds that fall in this category are not doing well. Namely, the "long-short" ones (aka market neutral), a lot of them are doing nothing more than trying to harvest the smart beta, the most popular ones being "value" and "small" To oversimplify, they go short growth and large, and long value and small. As most of us know, that's been the worst thing to do since 2009. Commodities have also been very bad during that time as well (but maybe finally picking up steam because inflation is finally coming back.

So for me, it's more just bad coincidence that the availability of the funds matched up with this time period of poor performance. I'd be careful not to read too much into that. And if you in any way have a belief in mean reversion, then, all things being equal, what you're pointing out could just as well be a bullish indicator for these funds going forward.
Even though your conclusion still ends up being applicable, it's probably worth clarifying the different strategies for the sake of better discussion here.
Maybe so, but you'd need to let Nisiprius know that, not me, reference "multialternative and market neutral" in the actual subject of this thread. I'll pass on any ownership of that confusion.
Oh, sorry for the misunderstanding. You referenced poor performance that was being discussed in this thread. The only performance I noticed in the charts was a proxy for trend-following strategies that have been contrasted traditional equity and fixed income etc.

You make a good point though, the title of the thread does imply more than just trend-following. I wonder how those categories have performed (as defined by Morningstar data, specifically). My guess is that market neutral equity has also done poorly, so either way, I think we agree on the conclusion even though we got there in different ways.
azanon
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Re: Unimpressive category averages of systematic trend, multialternative, market neutral, etc.

Post by azanon »

BJJ_GUY wrote: Thu Oct 14, 2021 1:05 pm
azanon wrote: Thu Oct 14, 2021 12:27 pm
BJJ_GUY wrote: Thu Oct 14, 2021 12:11 pm
azanon wrote: Thu Oct 14, 2021 11:08 am
nisiprius wrote: Wed Oct 13, 2021 5:28 pm I decided it was time to update the material on the performance of the funds Morningstar used to call "managed futures" funds and now calls "systematic trend" funds. All charts in this posting are based on calculations made from Morningstar data.
I admit I haven't had time to read the entire thread, but I would just comment here, yeah of course a lot of the funds that fall in this category are not doing well. Namely, the "long-short" ones (aka market neutral), a lot of them are doing nothing more than trying to harvest the smart beta, the most popular ones being "value" and "small" To oversimplify, they go short growth and large, and long value and small. As most of us know, that's been the worst thing to do since 2009. Commodities have also been very bad during that time as well (but maybe finally picking up steam because inflation is finally coming back.

So for me, it's more just bad coincidence that the availability of the funds matched up with this time period of poor performance. I'd be careful not to read too much into that. And if you in any way have a belief in mean reversion, then, all things being equal, what you're pointing out could just as well be a bullish indicator for these funds going forward.
Even though your conclusion still ends up being applicable, it's probably worth clarifying the different strategies for the sake of better discussion here.
Maybe so, but you'd need to let Nisiprius know that, not me, reference "multialternative and market neutral" in the actual subject of this thread. I'll pass on any ownership of that confusion.
Oh, sorry for the misunderstanding. You referenced poor performance that was being discussed in this thread. The only performance I noticed in the charts was a proxy for trend-following strategies that have been contrasted traditional equity and fixed income etc.

You make a good point though, the title of the thread does imply more than just trend-following. I wonder how those categories have performed (as defined by Morningstar data, specifically). My guess is that market neutral equity has also done poorly, so either way, I think we agree on the conclusion even though we got there in different ways.
I'll gladly accept the apology given your original statement which specified, "A market neutral fund like what you describe above would not be considered a systematic trend-following strategy. I have no idea what Morningstar's categories are, but I would guess they have an equity market neutral group that would be the fit for what you are talking about."

The subject WAS about funds including market neutral, and maybe only in an ancillary sense, trend following. The one's he's showing graphs for are not really trend following funds. And multi-alternative includes a host of strategies that have nothing to do with trend following. Vanguard's multialternative, for example, (Alternative strategies fund) doesn't really do any trend following, and it is labeled multialternative by morningstar. Now maybe some clarification is needed to tease some of these groups out, but as I previously stated, that's not for me to do but the OP'er
BJJ_GUY
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Re: Unimpressive category averages of systematic trend, multialternative, market neutral, etc.

Post by BJJ_GUY »

azanon wrote: Thu Oct 14, 2021 2:03 pm
BJJ_GUY wrote: Thu Oct 14, 2021 1:05 pm
azanon wrote: Thu Oct 14, 2021 12:27 pm
BJJ_GUY wrote: Thu Oct 14, 2021 12:11 pm
azanon wrote: Thu Oct 14, 2021 11:08 am

I admit I haven't had time to read the entire thread, but I would just comment here, yeah of course a lot of the funds that fall in this category are not doing well. Namely, the "long-short" ones (aka market neutral), a lot of them are doing nothing more than trying to harvest the smart beta, the most popular ones being "value" and "small" To oversimplify, they go short growth and large, and long value and small. As most of us know, that's been the worst thing to do since 2009. Commodities have also been very bad during that time as well (but maybe finally picking up steam because inflation is finally coming back.

So for me, it's more just bad coincidence that the availability of the funds matched up with this time period of poor performance. I'd be careful not to read too much into that. And if you in any way have a belief in mean reversion, then, all things being equal, what you're pointing out could just as well be a bullish indicator for these funds going forward.
Even though your conclusion still ends up being applicable, it's probably worth clarifying the different strategies for the sake of better discussion here.
Maybe so, but you'd need to let Nisiprius know that, not me, reference "multialternative and market neutral" in the actual subject of this thread. I'll pass on any ownership of that confusion.
Oh, sorry for the misunderstanding. You referenced poor performance that was being discussed in this thread. The only performance I noticed in the charts was a proxy for trend-following strategies that have been contrasted traditional equity and fixed income etc.

You make a good point though, the title of the thread does imply more than just trend-following. I wonder how those categories have performed (as defined by Morningstar data, specifically). My guess is that market neutral equity has also done poorly, so either way, I think we agree on the conclusion even though we got there in different ways.
I'll gladly accept the apology given your original statement which specified, "A market neutral fund like what you describe above would not be considered a systematic trend-following strategy. I have no idea what Morningstar's categories are, but I would guess they have an equity market neutral group that would be the fit for what you are talking about."

The subject WAS about funds including market neutral, and then maybe as an ancillary addendum, trend following. My original point was a good point but yeah sure, so was my correction. Now maybe some clarification is needed to tease some of these groups out, but as I previously stated, that's not for me to do but the OP'er
What performance are you referencing then? No one has been talking about market neutral performance in any recent posts, and all the charts have been absent of market neutral performance.

I was giving you the benefit of doubt. Now it just seems like you are mad that I was trying to point out to other readers that you were talking about something that is only mentioned in the title.

Go look at your post. The quote you pasted into your own post only references managed futures. You conflate long/short strategies with other types of market neutral strategies that may have historically done what you described. Then you talk about commodities, which would lead me to believe you are not really sure about what you were saying and now you're mad -- or more likely, you just weren't really clear about what you were saying considering the quote you replied to and the scatter shot of generalizations about all these strategies.

I'm not sure why you took offense to my reply, it was intended to be a friendly clarification I thought was needed. I stand by what I said, and I'm sorry that makes you angry
MIretired
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Re: Unimpressive category averages of systematic trend, multialternative, market neutral, etc.

Post by MIretired »

I think the post exposed the failure of mutual funds to track indices.
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