Brad Zigler: Packaged Managed Futures Aren’t (Mostly)

April 28, 2011

 

MutualHedge Frontier Legends (MHFAX), the newest portfolio, is closest to a classic multi-advisor commodity pool, including its rich fee structure.

 

  • DWS Enhanced Commodity Strategy (SKNRX) is in fact, a closet index tracker. SKNRX managers overweight or underweight the sectors within its commodity benchmark in an attempt to boost returns and minimize losses.

 

  • Direxion Commodity Trends Strategy (DXCTX) tracks the Alpha Financial Technologies Commodity Trends Indicator, a momentum-following mechanism that allocates short and long exposures over a diversified spectrum of futures.

 

  • Rydex|SGI Managed Futures Strategy (RYMTX) is also a tracker. RYMTX tries to match the performance of the Standard & Poor's Diversified Trends Indicator, an index similar to the Commodity Trends Indicator, but that incorporates financial futures.

 

  • iShares Diversified Alternatives Trust (ALT) is an exchange-traded fund that's truly active. The fund trades futures and currency forwards, endeavoring to produce noncorrelated absolute returns.

 

  • Elements S&P CTI ETN (LSC) is an exchange-traded note that offers exposure to the Standard & Poor's proprietary Commodity Trends Indicator. Investors, in addition to bearing commodity market risk, also undertake credit risk. The note's issuer is the Swedish Export Credit Bank.

 

  • PowerShares DB Commodity Index Tracking (DBC) is the passive benchmark that will provide the basis for calculating all the other products' beta and alpha coefficients. DBC is an exchange-traded fund that tracks changes in the Deutsche Bank Liquid Commodity Index, a long-only portfolio of diverse commodity futures.

 

Now, about the portfolio metrics. Sharpe ratios indicate the degree of payback—in terms of return—derived by taking on a security's risk; higher ratios indicate better risk-adjusted returns or bigger paybacks. R2 (r-squared) represents the percentage (0.00 to 1.00, or 0 to 100 percent) of a security's movements that can be explained by movements in DBC's price. Beta is a measure of a security's volatility relative to that of the DBC; a beta coefficient of 0.75 indicates the security exhibits less volatility—specifically, 75 percent—than the benchmark. Finally, alpha describes a portfolio's comparative performance on a risk-adjusted basis. An alpha of 0.09, for example, means the portfolio bettered the beta-adjusted DBC return by 9 percent.

As you can see from the product descriptions, only two products—MHFAX and ALT—don't somehow track an index. And, as you can see from Table 3, the very best return was obtained by the SKNRX portfolio - an index-hugger that limits its active management to tinkering with its benchmark's sector weights.

 

Table 3 - Performance Metrics (January 2010 - April 2011)

 

MHFAX

SKNRX

DXCTX

RYMTX

ALT

LSC

DBC

Average Annual Return

4.7%

29.6%

9.1%

1.8%

2.6%

5.3%

21.1%

Annualized Volatility

9.4%

16.4%

14.7%

7.5%

5.1%

16.4%

19.0%

Sharpe Ratio

0.42

1.75

0.57

0.14

0.37

0.28

1.39

r2

0.18

0.75

0.18

0.21

0.06

0.22

--

Beta

0.21

0.75

0.33

0.18

0.07

0.41

--

Alpha

-0.02

0.09

0.00

-0.04

0.00

-0.06

--

 

These results shouldn't be taken as an indictment of managed futures. There's just a paucity of true managed futures products that have built up track records.

Keep in mind that the commodities markets, too, have been skewed upward recently, along with equities. All the products listed have been positively correlated to stocks and commodities for the past year.

The numbers tell us this: Given the limited menu of managed strategies and the recent upward bias of the markets, a long-only index approach—vanilla or enhanced—has been a better stand-alone bet. That could very well change as more actively managed futures products season themselves in the coming months, however.

 

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