Broker Check

An Investment House of Horror

April 28, 2017
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Have you heard of "managed futures" as an investment strategy?  Trust me when I say you'd be better off if you haven't.  It's another one of Wall Street's brilliant marketing ploys, an asset class with supposedly good long-term returns but whose short-term results offer diversification benefits to a traditional stock and bond portfolio.

Let's first consider that, since 2008, the Credit Suisse Managed Futures Liquid Index returned a respectable +46.9% through March of 2017.  Not quite as good as the +78.9% return on the Dimensional Equity Balanced Strategy, but better than the +33.3% return on the Dimensional Five-Year Global Bond Portfolio.  However, you can't invest directly in an index, you need to own an ETF or a mutual fund directly.  Morningstar reports that the average Managed Futures mutual fund that still exists actually lost money over this period, returning a total of -0.2%. Let's assume that managed futures mutual funds collectively own the Credit Suisse Index before trading and management fees.  That means more than 100% of the returns of managed futures went to the managers!  Talk about a scam?  Managers make something approaching 30% to 40% in cumulative fees off the total asset base, and investors are left with a lot of volatility and nothing in the way of returns?

Of course, I'm not going to let investors (or advisors) who use Managed Futures off the hook so easily.  Because the evidence finds they do just as poorly at sabotaging their wealth with these funds.  I choose one fund with an acceptably long track record: the Guggenheim Managed Futures Strategy, that was highlighted as a top performer in this 2011 article.  The 10-year returns on this fund through March was dismal -- negative 1.5% per year.  But investors in the fund cost themselves another -3.4% per year in lost returns from buying and selling at the wrong time.  The actual 10-year investor return in the Guggenheim Managed Futures Strategy was -4.9% per year, leaving only about $6,000 left on an initial investment of $10,000.  I won't point out that the fund lost another 1% per year to taxes on behalf of the already beleaguered investor who happened to buy this thing in a taxable account.

Is there a better example of an investment "house of horror" (for all except the fund companies who manage these things)?  If there is, I don't remember it.

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Past performance is not a guarantee of future results. Index performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and is not an offer, solicitation, recommendation or endorsement of any particular security, products, or services.