Managed Futures Drawdown a Buying Opportunity
The best performing alternative investments in 2008 didn’t belong to rare fine wines, art, stamps or some commemorative coins. That prize belonged to managed futures or Commodity Trading Advisors (CTAs), several of which surged more than 30% in a year dominated by incessant volatility, a full-blown banking crisis and the evaporation of more than $25 trillion dollars of global wealth.
CTAs are now correcting sharply since March as a drawdown phase occurs - an anomaly driven by sharp trend reversals across several major asset classes combined with non-trending markets in other sectors. CTAs as a rule feed on market volatility.
CTAs are a subset of the alternative funds sector. The asset class is dominated by trend following trading systems introduced by mavericks like Richard Dennis in the late 1960s, who pioneered the term “Turtle Trading.” Today, the majority of the industry’s assets are dominated by trend following traders, including John W. Henry, Bill Dunn, Jerry Parker, Jr. and Paul Tudor Jones.
One of the leading programs in the United States is John W. Henry’s Financial & Metals Portfolio, up a stunning 22.45% per annum since 1984 – more than doubling the returns generated by the S&P 500, the MSCI EAFE Index, long-term government bonds and commodities. An original $1,000 investment in the JWH Financial & Metals Portfolio in October 1984 would be worth $142,990 through March 31, 2009. That compares to just $8,656 for the S&P 500 Index, $7,095 for EAFE and $11.567 for the Barclays Capital U.S. Long-term Government Bond Index. In 2008, JWH F&M skyrocketed 47.3%.
CTAs trade more than 100 global futures markets 24-hours per day with leverage; though extremely volatile, they maintain a truly negative correlation to common stocks amid market crashes, corrections and systemic dislocations. As global markets crashed in the fourth quarter, for example, CTAs surged more than 15%, critically offsetting losses from stocks in traditional portfolios.
Another important point worth noting is that, unlike hedge funds, which are only now coming under regulatory scrutiny, managed futures have been heavily regulated for decades. Managed futures are also generally far more liquid than hedge funds since futures contracts trade daily.
The top traders in this unique asset class are available for less offshore.
In the United States, CTAs are sold through limited partnerships and typically require the investor to be accredited or harboring net assets of more than $1 million dollars. The minimum investment is usually about $500,000. Some brokers also distribute these products with a lower entry requirement but the fees are so enormous that breakeven rates make these investments daunting.
In Europe, some of the best traders are available, including Man-AHL Diversified, Winton Futures and Rivoli International. These funds are available in U.S. dollars and euros. European private banks can buy these products for your account and the minimum is much less – ranging from $30,000 to $100,000. For most investors, a maximum 10% allocation to managed futures or CTAs is sufficient.
Since stocks bottomed in March, CTAs have undergone a drawdown, defined as a peak-to-trough decline of 15% or more. A drawdown is part and parcel of investing in this volatile asset class and historically is the best time to buy a CTA.
In 2008, the top CTAs earned a bundle from shorting global stock index futures, commodities futures and foreign currencies vis-à-vis the dollar. They also rode the bull market in bonds as Treasury’s went through the roof.
In the June issue of The Sovereign Individual (TSI) I’ll delve into several alternative investments, including CTAs, while examining their bear market performance since 2000.
After lagging stocks in the 1990s bull market, alternative investments like CTAs, fine red wine, rare stamps and precious metals coins have exhibited a negative correlation to common stocks this decade. This decade has been marked by the highest degree of volatility in history following a crash across global markets last year and the tech bust in 2000.
Judging by the ongoing volatility and depth of this recession/depression, these and other alternative investments should continue to enjoy solid returns over the next several years, serving traditional portfolios with a reliable hedge. Learn more in June’s TSI.
CTAs are now correcting sharply since March as a drawdown phase occurs - an anomaly driven by sharp trend reversals across several major asset classes combined with non-trending markets in other sectors. CTAs as a rule feed on market volatility.
CTAs are a subset of the alternative funds sector. The asset class is dominated by trend following trading systems introduced by mavericks like Richard Dennis in the late 1960s, who pioneered the term “Turtle Trading.” Today, the majority of the industry’s assets are dominated by trend following traders, including John W. Henry, Bill Dunn, Jerry Parker, Jr. and Paul Tudor Jones.
One of the leading programs in the United States is John W. Henry’s Financial & Metals Portfolio, up a stunning 22.45% per annum since 1984 – more than doubling the returns generated by the S&P 500, the MSCI EAFE Index, long-term government bonds and commodities. An original $1,000 investment in the JWH Financial & Metals Portfolio in October 1984 would be worth $142,990 through March 31, 2009. That compares to just $8,656 for the S&P 500 Index, $7,095 for EAFE and $11.567 for the Barclays Capital U.S. Long-term Government Bond Index. In 2008, JWH F&M skyrocketed 47.3%.
CTAs trade more than 100 global futures markets 24-hours per day with leverage; though extremely volatile, they maintain a truly negative correlation to common stocks amid market crashes, corrections and systemic dislocations. As global markets crashed in the fourth quarter, for example, CTAs surged more than 15%, critically offsetting losses from stocks in traditional portfolios.
Another important point worth noting is that, unlike hedge funds, which are only now coming under regulatory scrutiny, managed futures have been heavily regulated for decades. Managed futures are also generally far more liquid than hedge funds since futures contracts trade daily.
The top traders in this unique asset class are available for less offshore.
In the United States, CTAs are sold through limited partnerships and typically require the investor to be accredited or harboring net assets of more than $1 million dollars. The minimum investment is usually about $500,000. Some brokers also distribute these products with a lower entry requirement but the fees are so enormous that breakeven rates make these investments daunting.
In Europe, some of the best traders are available, including Man-AHL Diversified, Winton Futures and Rivoli International. These funds are available in U.S. dollars and euros. European private banks can buy these products for your account and the minimum is much less – ranging from $30,000 to $100,000. For most investors, a maximum 10% allocation to managed futures or CTAs is sufficient.
Since stocks bottomed in March, CTAs have undergone a drawdown, defined as a peak-to-trough decline of 15% or more. A drawdown is part and parcel of investing in this volatile asset class and historically is the best time to buy a CTA.
In 2008, the top CTAs earned a bundle from shorting global stock index futures, commodities futures and foreign currencies vis-à-vis the dollar. They also rode the bull market in bonds as Treasury’s went through the roof.
In the June issue of The Sovereign Individual (TSI) I’ll delve into several alternative investments, including CTAs, while examining their bear market performance since 2000.
After lagging stocks in the 1990s bull market, alternative investments like CTAs, fine red wine, rare stamps and precious metals coins have exhibited a negative correlation to common stocks this decade. This decade has been marked by the highest degree of volatility in history following a crash across global markets last year and the tech bust in 2000.
Judging by the ongoing volatility and depth of this recession/depression, these and other alternative investments should continue to enjoy solid returns over the next several years, serving traditional portfolios with a reliable hedge. Learn more in June’s TSI.
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