Given recent poor performance, it is unsurprising that investors have been pulling a lot of money of late from managed futures funds. A recent report from eVestment, the Georgia-based provider of analytics for investors and managers, discusses both the MF funds and macro funds and the challenges they face. In general, the prognosis for both patients seems dire, and the MF strategy presents doctors with the more critical case.
Within the context of the broader hedge fund industry, the numbers in the graph below represent a significant underperformance by these two strategies, and by funds of funds that depend upon them. Managed futures, which have been net flat since 2010, lost money in 2013. And macro, though performing better than MF, still came up with a number that is just 30% of the earnings of the hedge fund aggregate for 2013.
Not a Fluke
Unfortunately for these strategies, 2013 wasn’t a fluke. Looking at a five-year period instead, macro results are only half the results of the HF industry as a whole. These two strategies both suffered from the Global Financial Crisis and they both continue to suffer in its aftermath.
Managed futures also have a higher standard deviation (measured over the last 60 months) than the HF aggregate, so it seems that if you’re invested there your losses are at least buying you greater risk. [Wait. That can’t be right.]
Predictably, then, investors “redeemed, on net, more from managed futures strategies in 2013 than they did from all other strategies with net investor outflows for the year, combined, by a factor of 2X.”
Meanwhile, investors redeemed $9.8 billion from macro funds, and the AUM of such funds is down 1% in 2013.
Let’s drill down a bit on standard deviation. The report provides the average trailing twelve month annualized standard deviation for both of these two strategies (divided further into their respective “systematic” versus “discretionary” variants) from July 2010 to the present. Between April 2011 and April 2013, volatility so defined for either variant of the MF strategy was a good deal higher than at present: 14% was its floor at that time, 16% its ceiling.
Likewise for the macro strategy, the high recent plateau for volatility defined as above came in late 2011 and early 2012. That plateau will be found right at the 12% mark, for both systemic and discretionary macro.
Size, Assets, and the Future
The report divides the results from each strategy into three buckets by size: large (more than $1 billion AUM); medium (between $250 million and $1 billion); small (less than $250 million.) in both strategies, the large-AUM bucket outperformed its peers in FY 2013, although the difference in performance is not especially marked or consistent quarter by quarter.
Separately, it divides the managed futures strategy I particular by asset focus. There are four foci in this space: agriculture, metals, energy, and the ever-popular exam answer, “All of the above,” or a multi-commodity strategy.
As it often is elsewhere, “all of the above” is the wrong answer here. Such strategies were the worst performing in the generically poorly-forming crowd of managed futures possibilities.
The eVestment report measures each of the specialized three asset foci against its counterpart in the S&P GSCI sub-indices, and the multi-commodity strategy against the S&P GSCI itself. By December 2013 the best performing MF type, measured by a trailing 12-month geometric ratio against its S&P counterpart, was energy. Energy MFs actually beat out the GSCI Energy sub-index, by virtue of a surge in the final quarter covered.
One theme of the report is that both of these strategies face a large issue, not one created but that that has certainly been exacerbated by recent bad performance: they are losing their best asset base. The fund of funds industry itself has always been a critical source of funds for these two strategies, and the FoHF world itself is shrinking.