Book Review: Rice On Managed Futures

At the beginning of June, we ran a review of Bob Rice’s recent book, The Alternative Answer, just out from HarperCollins.

That book makes the point that managed futures constitute an important asset class, one that doesn’t correlate with traditional (largely equity) investment strategies at the retail level. Thus, said Rice, the ordinary investor should want exposure.

Fees And Performance
Rice suggests that he get this exposure by one of the “new liquid alternatives, in this case [by investing in] mutual funds that invest in a group of managed futures managers. These …have generally performed their noncorrelated duties well since coming to market over the past couple of years.”

After we posted our review of the book, we received a fascinating comment from “Jason.” Jason says the multi manager structure is a bad idea. “[Y]ou are not investing directly in a CTA, but in a product designed to REPLICATE their return streams. Fees are too high for the performance, and a segregated account in the CTA itself is a “better approach,” says Jason.

To encourage further exchange and understanding, I went back to Mr. Rice and asked him to expand on managed funds and to reply to Jason’s contention.

As to the excessive fees, he agreed that this can be a problem. It depends, he said, on the fund one is talking about. “There are certainly some mutual funds that charge too much. In fact, I warned about that in the book. But this remains the best way to go for most investors who have a relatively small amount that they can afford to invest.”

CTAs typically take on high net worth individuals or institutions, and they require account minimums. The minimums vary, and the CTAs with that have no track record may in order to attract money may keep their minimums fairly low. But those aren’t the one’s you’d want to depend on.

The CTAs that do have a track record will also have substantial minimums, ones that put them out of the range of the investor from whom Rice wrote his book. “There aren’t a lot of easy and great channels for the retail investor to get into that asset class,” he said, “though if anyone has any specific ideas I’m open to listening to them.”

We also spoke about the availability of passively managed approaches. Rice cautioned, “These funds are easy for the professional managers to game. It’s as if you were to broadcast to the world ‘This is how I’m going to trade! This is my algorithm!’ -- don’t you think the pros would front-run you?

Non-Fundamentalism And Soybeans
I asked about how managed futures get and stay non-correlated. One reason, as Rice says in his book, is that there is “almost no fundamental analysis going on” in the managed futures world. Their livelihood comes from identifying patterns in the prices of the assets they follow. That’s why his book riffs off of cocktail party “chatter.” At such a party, you might hear “a major seasonal top is due in lead” or hints about a relationship between the British pound and the rising price of pork bellies.

He spoke briefly during our conversation about the soybean market in 2012. Soybeans began the year near $12.30 a bushel. By early May the price was above $14.00 and in July it really took off. In August, well into a hot and dry summer, the price was above $17. In early September it topped $17.50.

This created a ripe opportunity for trend followers within the managed futures world. A trend follower looks precisely for opportunities to get on board such a move. Of course, it looks easier in hindsight than it is in fact. Or, as the saying goes, “the trend is your friend, until it isn’t.”

At any rate, the bottom line for retail investors is simpler, though unrhymed: noncorrelation is your friend.