How to Handle the Long Draw Down in Managed Futures
I have been trading managed futures since 1994. This has been one of the most challenging periods ever. Not just due to the draw down but the duration of the draw down. I am not alone. I have spoken to many of the industries veteran traders who have been around since the 1980s and the general consensus is the same. One original Turtle trader told me that this is the worst he has ever seen in his career. We spoke and then he mentioned that potentially over the last 100 years this might not be so unique. Many commodity trading advisors have quit. Clients abandoned the field. Seems so many have thrown in the towel. Personally I have had clients leave. It truly has been a challenging period. Even the leading Long/Short Hedge have experienced a difficult period recently. Maybe the place to be is in cash.
Through numerous conversations with long time successful managers some ideas of how to handle the long draw down in managed futures have been crystallized.
1. Lower exposure ( I only risk between .4% to .75% on a position)…I have seen recently many managers close because they traded much larger than this.
2. Trade in smaller risk per trades
3. There are many who suggest developing shorter term strategies. I am not in agreement with this. Potentially even extend trading periods. ( I have several trading models, one in which is a long term trend following system & it has held up and is positive).
As much as past performance is not indicative of future performance…and it has been extremely tough…taking a contrarian stance, this might be one of the best times ever to invest in managed futures. This is extremely tough to do. I bought draw downs of some CTAs and their draw downs got even worse ( even to the extent of worst draw down ever).
We are dealing with uncertainty. We must accept the risks…We must have patience and discipline. The reality is that very few actually make money investing in managed futures as they do the wrong things. They buy a CTA when he is doing well and sell at the first inevitable draw down. There will always be losses and draw downs. This draw down however has been very tough…
Past performance is not indicative of future performance