Been seeing these….the fact is trendfollowing a basket of commodities and futures has been VERY tough since 2011….but I am always the optimist for trendfollowing….
A hedge fund strategy that seems to have fizzled
The ‘managed futures’ model has not been returning the numbers many were hoping for
Published: 12:25 October 4, 2015 Gulf News
By Stephen Foley, Financial Times
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The hedge fund strategy that has attracted the most money this year is on course to cause some of the biggest losses for investors, in the latest example of the dangers of going with the crowd.
Institutions and individuals have piled an estimated $20 billion (Dh73 billion) into managed futures funds, which use computer programs to follow market trends, but returns have turned negative amid the whipsaw markets of the past few months.
These trend-following funds — also called commodity trading advisers, or systematic macro funds — trade on the theory that assets that are going up are more likely than not to continue going up, and that assets that are going down are more likely to continue going down.
There is strong academic evidence supporting the idea that momentum is an enduring feature of financial markets, and it makes intuitive sense, too, given herd behaviour among investors. Yet in recent years trend-following funds have provided almost relentless heartbreak for those who buy them.
Too little divergence between asset classes because of quantitative easing (2010-13). Too many sudden reversals of trends (2015).
Financial conditions never seem to be quite right. One is reminded of Sybil Fawlty’s mother, with her morbid fears. “Open spaces. Confined spaces. It’s very difficult getting the space right for her, really.”
Long slide in oil prices
The promise of managed futures is of returns uncorrelated to the rest of the financial markets and a hedge against a long slide in equities, but investors are left asking if they have again been suckered into a strategy that has lost its ability to perform.
It is only a few months since the optimists declared managed futures were “back in business”. The long slide in oil prices, the rising US dollar and the continuation of the equity bull market made 2014 the best year for the strategy since 2008, with returns of 10.7 per cent in such hedge funds, according to HFR, the data provider.
Returns were back in the double-digit ballpark they were in during the pre-financial crisis period and in 2008, when they were about the only hedge fund strategy to withstand the market chaos.
As night follows day, outperformance led to inflows, but investors lured back into managed futures hedge funds at the start of 2015 are now down 2 per cent, according to HFR’s latest estimate. Most of the long-term trends of last year have faltered in 2015.
The losses compare with a year-to-date gain of 0.2 per cent for the average hedge fund. The only sectors of the industry to have fared worse this year are hedge funds focused on energy stocks or energy infrastructure.
Retail investors burnt
According to eVestment, $14.3 billion of new money went into managed futures hedge funds in the first seven months of 2015, swelling assets under management by 11 per cent, the biggest increase of any hedge fund strategy tracked by the research group. The strategy is on its longest streak of monthly inflows since 2010.
Performance-chasing retail investors have also been burnt. An additional $5.1 billion flowed into managed futures mutual funds in the year to July, according to Morningstar, the data provider, swelling these funds’ assets by one-third.
Inflows so far this year have already outstripped the full-year record set in 2011. (Inevitably, 2011 and 2012 were the worst two years for managed futures mutual funds in terms of performance; they posted declines of 6.92 per cent and 7.39 per cent, respectively, on Morningstar’s numbers.)
Of course, managed futures have not been dinged nearly as heavily as equity markets this year, so one might argue they have performed their function as a hedge. They appear to have scaled back their exposure to equities just in time to escape the worst of the late-August rout. The modest negative returns reflect well against an S&P500 that is down almost 6 per cent.
But the average core bond mutual fund has returned 0.2 per cent so far this year, and these bond funds are available for a fraction of the fees.
Believers in managed futures say they will return to their heyday of high-teens percentage returns just as soon as market conditions return to pre-crisis norms, with central bank repression out of the way and a wider diversity of monetary policies and gross domestic product performances among major economies.
A gloomier possibility is that greater competition in the sector, or post-crisis reforms, or some unknown has changed the landscape permanently.
The only certainty is that managed futures are among the highest-fee hedge funds and mutual funds on the market, and they are headed for their fifth negative year out of the past seven.
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