I wanted to comment on the CTA performance paper I mentioned the other day. From the paper:
We focus on commodity trading advisors, a subset of hedge funds, and show that during the period 1994-2007 CTA excess returns to investors (i.e., net of fees) averaged 85 basis points per annum over US T-bills, which is insignificantly different from zero. We estimate that CTAs on average earned gross excess returns (i.e., before fees) of 5.4%, which implies that funds captured most of their performance through charging fees. Yet, even before fees we find that CTAs display no alpha relative to simple futures strategies that are in the public domain.
So, these funds do a good job of caputring alpha(or at least the beta of the strategy) but charge way too much. I am a huge fan of managed futures, but it is nothing more than a long/short approach to commodities (though some trade finanaicals and interest rates) very similar to my paper. The marketers for these funds always compare graphs that show the benefit of adding them to a standard 60/40 stocks bonds allocation, but never to a balanced allocation including commodities (where the benefits are much more muted).
I also think this is an area that was formerly alpha that has now been commoditized to alternative beta. Most (the paper estimates 75%) of CTAs are just simple trendfollowers that can be captured with some standard strategies. As an example, RYMFX was the first public mutual fund to come out trading managed futures, and cost a more expenseive fee of around 1.7%. Competition will bring those fees down, and the LSC ETN charges around 75 bps.
One could substitute LSC for some of all of the commodities portion of the allocation I mentioned.
Here is also a great paper from Conquest Capital on “The Beta of Managed Futures“. (Hat Tip: RR).
Over the past 38 years, yesterDAYs return would rank as the 19th best YEAR for the MSCI EAFE Index.
It’s all about risk management!
You’ve suggested the benefits of diversification have been getting diluted, as more institutional investors follow the “endowment” model.
It’s getting very crowded, not only in terms of asset allocations, but in terms of finding the right implementation vehicles. There’s a limit to how much superior investment expertise is out there. So the asset allocation is going to be less potent because there are more people doing it. And then the global liquidity situation is changing as well. So our view is that performance in future needs something more — two things more: first, better risk management, because correlated risk has become a big issue, and diversified asset allocation no longer gives you the risk mitigating characteristics it used to. Second, is identifying new secular themes that will play out over the next five years, and trying to be a first mover in those, and that’s what we’re working very hard at doing.