Why Managed Futures
The CME Group had several presentations. I attended the one given by John Labuszewski, Director of Research and Development. In his spiel, Labuszewski gave the top five reasons investors should hand over their money to a manager for investing in futures such as energy, agriculture, currencies, and the like. Those reasons were:
1. Potentially attractive returns.
2. Superior reward/risk ratio.
3. Possibility of returns in bull and bear markets.
4. Exposure to all major asset classes.
5. Opportunity to invest with confidence in a regulated industry.
Indeed, managed futures did look pretty seductive when CME showed the returns from the Barclay CTA (Commodity Trader Advisor) Index. It's pretty difficult not to get seduced by a chart like this, though the CME group only showed it in data form. I especially loved the table on the CME website showing annual returns vs. the S&P 500. It showed managed futures increasing in years where the stock market declined, including a 14.09 increase in 2008, when the S&P 500 declined 38.48 percent. Now that's what I call diversification!
Labuszewski did note that the Barclay CTA Index was not associated with the British banking giant, and stated the index could have some survivorship bias, meaning that managers going out of business are no longer included.
Heck, all indexes have some survivorship bias and I'm all for making money in every environment. Just look at this steady increase with no market plunges like stocks display with regularity. And much as I want to believe, I'm going to do a little more research before I fork over money to a manager that typically charges two percent annually plus 20 percent of the profits.
Barclay CTA Index
The organization that owns this index recently changed its name from Barclay Group to BarclayHedge and the first thing you will notice when you click on their site is a pop up noting they are not affiliated with Barclay's Bank.
I spoke to the president and founder of BarclayHedge, Sol Waksman. Waksman noted that his CTA index was not the entire universe of CTA managers. The index was comprised of those managers requesting inclusion in the index and qualifying as having a minimum of 43 months of performance. If accepted, the manager would self-report performance and be included in this equally weighted index.
An alarm went off in my head as the words "selection bias" came to mind. To explain what this is, imagine if mutual funds didn't have to report performance. Let's say I develop a mutual fund index and encourage the fund families to be included in my index and that this inclusion would help in their sales efforts. It would be reasonable to expect winning families to report their winning funds and leave out their losers. So my index report would be showing how US stock mutual funds far outpaced the US stock market as a whole. Obviously, Morningstar reports on the universe of mutual funds and we know that, in reality, they underperform.
I presented my selection bias theory to Waksman and he noted you might expect this but "it's not statistically true." When I asked Waksman for the data to show this, he responded that the data would need to be developed and that would take a long time. Funny, the way I learned statistics was that the data had to be run before making any statistical conclusion.
Finally, I asked Waksman point blank whether the Barclay name change had anything to do with the insistence from Barclay's bank that this was an infringement of their name. He responded, "I don't think I should answer this."
Turn the page to see CME's response
I caught up with the CME presenter, John Labuszewski, as well as Michael Shore, a CME Associate Director of Communications. In our conversation, I posed some very pointed questions.
- First, I asked them to confirm my understanding that all futures contracts were a zero-sum game before costs. This means that, in the aggregate, not a penny has ever been made in futures. Both agreed.
- Next, I asked why the zero sum game wasn't stressed in the Money Show presentation that I thought was very seductive, leaving consumers to believe managed futures had great returns with little risk? Shore responded that the zero sum game was a well-known fact and the CME group doesn't feel it necessary to have it on every page. Later, they admitted it wasn't on any page of the Money Show presentation and they didn't know whether or not the Money Show attendees knew not a penny had ever been made in futures, in the aggregate.
- Next, I noted their web site comparing the CTA index to the S&P 500 also stripped out dividends from the S&P 500. I asked why the CME group saw fit to only show part of the return of part of the market to represent stocks. They didn't respond to several requests, but later noted they would be removing the piece from their web site. This piece was also referenced last week by Jason Zweig in The Wall Street Journal on the practice of comparing total returns to only a part of the S&P 500. The misleading comparison was still on their site, days later, though they took it down after this story first ran and provided the link.
In my opinion, the CME Group presented a very biased view of managed futures. The CME Group is a $19 billion market capitalization company. Their web site says "the CME Group is where the world comes to manage risk." Futures make all the sense in the world for the likes of the farmer and the food processor that both want to lower risk by setting the price of corn ahead of time. They both win and the CME Group should be applauded for providing this service.
Speculators, on the other hand, are part of a game that has a zero sum outcome and provides no insurance benefit. I personally don't buy into the Barclay CTA Index of a self-selected and self-reported sample of managed futures being presented as representative of the industry as a whole. I suspect the reality is that the managers have made a bundle off of investors, assisted by the CME.
I understand that the CME group has a vested interest in having more futures contracts trade. I just don't agree with them telling part of the story to consumers at the Las Vegas Money Show or those visiting the CME web site. In fact, I think the odds of making money are better at the Las Vegas casinos than the managed futures casino presented by the CME Group. This gets a strong thumbs down from me.