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Investing in Managed Futures

I recently wrote a review of Mike Dever’s Jackass Investing: Don’t do it. Profit from it.  Dever is a proponent of adding managed futures (among other assets/strategies) to portfolios in order to increase diversification. He provides four managed futures mutual funds in his book and action section of the book’s website – Altegris Managed Futures Strategy C (MFTCX), Rydex|SGI Managed Futures Strategy H (RYMFX), MutualHedge Frontier Legends C (MHFCX) and Natixis ASG Managed Futures Strategy A (AMFAX).

Managed futures can be defined as alternative investments which take long and short investments in futures contracts and options on futures contracts. Managed futures can be accessed either directly with  licensed CTAs (Commodity Trading Advisor) who are regulated by the CFTC (Commodity Futures Trading Commission) or via mutual funds and ETFs/ETNs that mimic managed futures strategies.  When investing with a CTA a large minimum investment is typically required, making mutual funds and ETFs a more viable option for many investors.

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Managed futures mutual funds tend to have relatively high fees and there are limited ETFs/ETNs in the managed future asset class – WisdomTree Managed Futures Strategy ETF (WDTI) and ELEMENTS S&P CTI ETN (LSC) are currently two of the only ETF/ETNs in the managed future world.

The fees on the four mutual funds recommended in Dever’s book are below along with the fees for WDTI and LSC (data courtesy of Morningstar):

 

Fund Load? Expense Ratio
MFTCX no 4.62%
RYMFX no 1.97%
MHFCX no 6.67%
AMFAX 5.75% 1.70%
LSC N/A 0.75%
WDTI N/A 0.95%

The expenses for managed futures mutual funds are significantly higher than a typical index equity or bond mutual fund and WDTI and LSC have higher expenses than many index based ETFs.

Managed futures typically have low correlations to other asset classes such as stocks, bonds, and real estate making them a potentially appealing asset class for investors seeking to improve diversification.  An asset correlation matrix for the four funds listed in Jackass Investing along with LSC and WDTI is below.  The funds are listed alongside ETFs representing some traditional asset classes – US Equities (SPY), bonds, (AGG), emerging markets (EEM), Treasury-inflation protected securities (TIP), Gold (GLD) and real estate (VNQ):

The managed futures funds have shown higher correlation among themselves and lower correlation to equities and REITs over the past 6 months.

Below is the performance of the four mutual funds and WDTI/LSC compared to SPY over the past year:

The performance over the past 5 years is below:

The managed futures funds have undererformed SPY in recent months, but if one is seeking low correlation to SPY then this is not surprising considering the recent bullish trends in equities.

If and when more ETF providers start offering exchanged based managed futures products, then fees should theoretically decrease. It is worth noting that in December ProShares filed for three managed futures ETFs. The hope is that with increased competition investors will have a wider range of strategies to select from in the managed futures class and less performance will be paid back to the fund sponsor in the form of fees with more performance returned to investors. Until then, investors who do not qualify for the minimums in CTA accounts are left with limited options in the ETF and mutual fund space.

No positions in funds listed

A Review of “Jackass Investing”

Michael Dever’s Jackass Investing: Don’t do it. Profit from it. has surely raised some eyebrows and not just because of the aggressive title.  If the title makes you  uncomfortable, you will feel more uncomfortable after you read Dever’s bold challenge of 20 common investment myths. Dever took me out of my comfort zone as an investor and challenged many of my own assumptions. I finished the book as a better investor, armed with new insight on how to better create a portfolio with potential for greater return and lower risk.

Dever argues that investors need to understand both the baseline conditions and return drivers for investment and trading strategies. He encourages readers to rethink the baseline condition assumptions behind commonly held investment beliefs. For example, US stocks have been a great investment for over 100 years, but this does not necessarily mean they will continue to be a great investment if baseline conditions change in the United States.  Relying on historical repetition is not a sufficient investment thesis if baseline conditions change.

Jackass Investing exposes readers to the potential benefit of investments which have different “return drivers”.   These different return drivers act a a source of diversification and trading/investing strategies with different return drivers, not traditional asset classes, can act as true sources of diversification.  Dever is clearly not a fan of buy-and-hold investing primarily because it is not a sufficient source of diversification. Rather, Dever lays out in specific detail several actionable investing strategies with different return drivers and low correlations to popular asset classes. The need to diversify strategies and not just asset classes is also an argument I have made frequently on Scott’s Investments.

There is also an actionable portfolio on the official website for Jackass Investing. The portfolio is possible for an individual to implement but given the amount of positions and strategies, a reasonbly sized portfolio is necessary to implement all of the strategies.  However, it would not be difficult for an individual with a smaller portfolio to construct a custom portfolio using the recommendations in Jackass Investing.

Michael Dever is the founder of Brandywine Asset Management which trades portfolios in the global currency, interest rate, stock index, mets, energe and agricultural cash, futures and options markets. This rightfully gives him insight and bias towards managed futures strategies.  Jackass Investing encourages readers to invest in managed futures strategies, either directly with CTAs (Commodity Trading Advisor) or via mutual funds and ETFs that mimic managed futures strategies.  Currently the primary drawback is not in managed futures themselves – I believe they provide diversification benefits because of their low correlation to popular asset classes – but that ETF and mutual fund options are limited in the managed future space.  However, in the ever-evolving world of ETFs it is no doubt only a matter of time before more options become available.