We recently received a letter from a reader challenging something we had written regarding the performance of managed futures in 2008. The reader cited a study highlighted in a popular business magazine entitled, “Fooling Some of the People All of the Time: The inefficient Performance and Persistence of Commodity Trading Advisors.”
The timing seemed odd as the study, which was put out by the Yale International Center for Finance, came out in October in the midst of one of the best years for CTA performance in the last two decades.
And the study pulls no punches. “We argue that the CTAs appear to persist as an asset despite their poor performance, because they face no market discipline based on credible information.”
In fact the study seemed downright hostile and the language used seemed inappropriate for what is supposed to be an academic work. “We explore explanations for why CTAs persist despite two decades of poor performance.”
It was as if they were asking, since CTAs suck so bad, why would anyone invest in one?
They seemed truly perplexed, which made me perplexed given the numbers CTAs have put forth recently. Adding to my confusion was the item that they had to eliminate more than 80% of the data from the database they used “to eliminate the influence of various biases induced by strategic returns report and database construction.”
The study didn’t sufficient explain why they needed to exclude more than 80% of the data or how they arrived at their adjustments for the reporting biases they cited.
Sol Waksman president of Barclay Hedge, a CTA database (not the one used) says, “It was not very sound research.”
Waksman calculates the Barclay CTA Index, which returned 14.11% in 2008, and says that his index as well as several others are calculated without any of the biases cited in the report. The Barclay CTA index by the way returns were roughly six times those cited in the report for the period covered.
It is also rife with loaded language and conclusions such as “We explore explanations for why CTAs persist despite two decades of poor performance,” and “consider a naïve investor who is contemplating an investment in CTAs.”
And who are these learned experts? One, Geetesh Bhardwaj, was a vice president for AIG Financial Products. That was the investment arm of the insurance giant AIG that did so well it required—at the time—the largest bailout of a private company ever. Jus the type of person to take investment advice from.
If you look at the link to the study you may notice that the reference to AIG Financial Products has been removed from under Mr. Bhardwaj’s name but it is there in the original.
I do not have sufficient academic credentials to challenge the work of the Yale International Center for Finance but the timing besides being poor is suspicious in that managed futures outperformed not only traditional asset classes but all other alternatives in 2008. And not by a little but by a lot.
A couple of years ago longtime CTA Salem Abraham when confronted with the typical bias against managed futures, stated during a panel, “You can’t spend a Sharpe Ratio.”
Well the types of strategies that give comfort to more traditional allocators have better Sharpe Ratios than most CTAs but it did not stop them from having poor, sometimes disastrous, returns in 2008.
