There are a lot of you out there on StockTwits.
I get more questions via email from traders like you about the managed futures/forex world than about any other subject. It seems that a lot of you aspire to manage money in stocks, futures or forex.
While I mostly have been a proprietary trader through the years, I do know a lot about the managed futures and forex space within the alternative investment category. A number of the other StockTwit bloggers know the ins and outs about managed funds from the stock market perspective (knowledge I do not possess), such as my friends Joshua Brown at TheReformedBroker and Derek Hernquist, Howard Lindzon, Dragonflycap, Quinttatro, johnsontrades, valueplays, and joefahmy.
I was a trader in the 1980s and early 1990s with Commodities Corp. (CC), the original multi-trader futures and forex prop house. My performance during those years for CC was acceptable, but not great – 18.52% AROR, no losing years, worst drawdown of about 10%. Frankly, I was a boy among men at Commodities Corp. CC launched the trading careers of the superstars – the guys you read about in Market Wizards. I do not place myself in their league.
Consider this post to be the first of many on the subject of managed futures and forex, what the industry is like and what steps you would need to take to qualify as a player. I think that you will be very surprised with some of the information I will share.
Presently about $290 billion is being managed in futures and forex. This is money dedicated to Commodity Trading Advisors (CTAs), as reported by Barclay Hedge. Other areas of the alternative investment category also have commodity and forex exposure.
I believe that within five years the managed futures space will grow to $1 trillion or more. It is the fastest growing subset of the hedge fund world. The opportunities in the next five to ten years are great for emerging traders that have the right stuff.
The ten largest CTAs manage $82.4 billion, or more than a quarter of all assets under management (AUM). You would think that these CTAs are superstars. Not so!
|Ten largest CTAs by Assets Under ManagementThrough March 2011|
|Assets Under Mgmt||$8.2 bil||$1.8 bil to $23.6 bil|
|5-yr AROR||7.86%||-3.23% to 19.27%|
|5-yr worst drawdown||(11.09%)||(8.49%) to (29.43%)|
|5-yr. Calmar ratio||.71||-.11 to 1.53|
|Duration of longest DD – peak to valley to new peak||23 mos||9 mos to 46 mos|
I want to note two things.
First, the performance of the largest CTAs is pathetic, in my opinion, although with a losing year going in 2011, I am a bit shy to be too critical. These CTAs receive huge asset infusions because institutional money flows to the big boys, despite their poor performance. CTAs with a long history, big staffs and huge AUM levels receive the assets allocated by pension funds, huge Commodity Pool Operators (CPOs), etc. The $100 million AUM level is the minimum for a CTA to be considered for institutional funding. The CTA with the most AUM ($23.6 Billion, that’s with a “B”) has a five-year AROR of 4.74%.
Secondly, I believe that the Calmar Ratio is the best measure of risk-adjusted performance (although the Sortino Ratio is not bad either). To determine your own Calmar, divide your compounded average annual rate of return by your worst month-ending peak to valley drawdown.
The managed futures industry is obsessed with the Sharpe Ratio, which I think is a useless measure, mainly relied upon by institutional money placers to justify poor performance. At industry conferences, such as the Altegris event in San Diego two weeks ago, investors and pool operators drooled during a presentation of the Sharpe Ratio. Yet, the Sharpe Ratio penalizes upside performance. A trader who holds his or her money together with solid risk management for 10 months, then has two wonderful months to make a year, would be murdered by the Sharpe Ratio.
Third, are you surprised by the duration of the longest peak-to-valley-to-new peak drawdowns? Would you have guessed these drawdowns would have been so long? The truth be told, even CTAs in which I have great respect experience long drawdowns.
In the next post I will focus on the performance stats of the CTAs I have selected for my own IRA funds. I want my IRA money in managed futures, traded by people other than myself.