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| Daily Jurojin - Monday, May 18, 2009 |
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Monday, May 18, 2009 The way ahead for your moneyThere's an excellent article in this weekend's Wall Street Journal1 - in which the author undermines some of the claims made by the investment funds who run managed futures funds. Well, he doesn't so much bash these guys over the head, rather the author, Jason Zweig points out some of the flaws and pitfalls in measuring the industry. It piqued our interest since here at Jurojin Weekly we essentially perform the same task, while we don't actually handle your money - we simply tell you what we think is hot and what is cold with some guiding parameters.In exchange we charge our clients $2,995 per year and we hope to high heaven that they make far more each year. Given the fact that so many customers do come back and that we have a neat and loyal database, suffice it to say that we are proud to admit that the returns are not too bad at all. Mr. Zweig points out that these funds are managed by what you'd call commodity trading advisers or CTAs and they manage around $199 billion trading in the same type of futures contracts that we deal in here. Corn, crude oil, soybeans, interest rates and currencies. Last year the average fund gained 14%, which compares ever-so favorably against a 51% slide in the stock market. Some rely on the gut-instinct of the guys who run them while others are purely formulaic and rely on strength of trend or other momentum-identifying oscillators. Here at Jurojin we combine the fundamental developments with an observation of the technical picture. There's simply no substitute we find! One of the neat facts about futures is that they do at least as well as stocks and do well when inflation gets a little uppity, but thanks to the fact that most perform well when the dollar falls, since they are after all commodities and so a dollar hedge, the commodity futures universe has done well when stocks rise and bonds fall. The Barclay CTA index has performed well averaging 12.2% returns since 1980 and has only suffered down years on just three occasions. But despite their fantastic returns it would seem that not all that glitters is gold in the CTA world. According to Mr. Zweig, the highlighted performances are not replicated across the gamut, they are expensive to get into and come with hefty performance fees and there are good reasons to expect that the same returns aren't manageable going forward. According to the team that compiles the Barclay index, some 15% of the index constituents are replaced annually. In order to qualify for inclusion, CTAs must provide four years of returns. Many who fail simply don't cut the mustard, and those that do well, boost the appearance of the industry as a whole. Because investors are only required to put up typically around 15% of the value of a futures contract when they trade, they benefit from magnified gains (and losses). That means that over the years, much of the excess returns are a function on the rate applied to collateral. Of course these days, interest rates are practically zero making it harder for fund managers to show easy gains. Many funds show relatively easy victories by selling what we call in the trade, the roll. That means that you close out your nearby future and establish a fresh position in the next maturing contract at a lower price. According to this story more than half of the positive performance of CTAs comes from rolling forward futures contracts but over the years and the massive recent bull market for commodities, that scenario isn't omnipresent. Traders crack on to this gravy train and iron out the easy money. Given that many managers charge the famous "two and twenty" or 2% management feed plus 20% of all profits from trading, it's hard for customers to make money. And with the additional perhaps 6% broker-referral fee to buy into these managed futures portfolios, it's getting increasingly hard to stay the course and actually make money - unless you happen to be the manager. As Mr. Zweig concludes, it can indeed be hard to turn a profit in this game. As a manager you need to understand what you're doing and see the wood beyond the trees. Trying to stay focused when markets are not trending very well is difficult but IS ultimately manageable. That's why we have a track record posted on our website. 1. Should Managed Futures Be in the Cards for You? Jason Zweig Saturday May 16, 2009 The Supreme Council of the Secret Order of Jurojin |
