Alpha Simplex wrote a short but wide ranging paper that covered the history of managed futures as a strategy, the history of that strategy working its way to retail accessible funds and the possible benefits managed futures in ETFs of which there are now quite a few. The firm has been running the Alpha Simplex Managed Futures Strategy Fund (ASFYX) since 2010. The paper seems to support the very new Alpha Simplex Managed Futures ETF (ASMF) which started trading in mid-May.
The difference between the two is that ASFYX runs a managed futures strategy with their own process that as of March 28 had 102 positions (45 long, 57 short). ASFYX also has a small percentage of its assets tracking a faster signal than the normal 200 day/10 months that most managed futures strategies follow. The new ETF is a replication of many managers different managers but only allocates into 20 markets. The complexity of the strategy lends itself better to mutual funds for reasons the paper gets into and replication, for now anyway, is easier for the ETF wrapper to participate in the space.
When I've said in past posts that not everything lends itself to the ETF wrapper, managed futures strategies was one example I had in mind. That doesn't mean strategy must be better than replication. Replication certainly is simpler. Andrew Beer who runs the iMGP DBi Managed Futures Strategy ETF (DBMF), a replication strategy, said in that webinar I mentioned the other day, that DBMF can replicate with just 10 different markets to get about 90% of the effect. Replication also avoids idiosyncratic (manager) risk. Yes, DBMF having the word strategy in the name is confusing but logically, there will be times where replication will outperform and times where it lags so saying one is better isn't the way to frame it.
I hold ASFYX for clients and personally on the differentiation I mentioned above regarding the faster signal.
Here's an article I wrote for theStreet.com in March, 2008 about the Rydex (now Guggenheim) Managed Futures (RYMFX). I've mentioned quite a few times that I think it was the first mutual fund in the space and the Alpha Simplex paper seems to be confirming that without naming the fund. That was the second article I wrote about RYMFX but the first one appears to not be on the internet anymore. In the article I said I had owned it for about a year so I apparently bought it when it was brand new.
Now, 17 years later, I don't recall the process that led me to the fund or the research I did to actually buy it but my assessment of its strengths and weaknesses back then was on point. I'd like to think I understand it much better than I did back then but it is interesting to see what parts of my investment process have stayed the same which is wanting to know what expectations a strategy is setting, knowing the drawbacks and sizing appropriately. Editorial note, how in the hell have 17 years gone by? LOL
The paper quickly mentioned carry and global macro as other examples of trend. Managed futures falls under the header of trend but the two terms are often used interchangeably. We've talked quite a bit about carry lately as I try to figure out what I think. For now, I am skeptical of the various that goes long commodities in backwardation and short the commodities that are in contango. I can believe that the strategy compounds positively but allocating based on trend (regular managed futures) seems more reliable to me than allocating based on term structure.
Some people invest on fundamentals and some invest on technicals but this manifestation of carry doesn't seem to do either. I will continue to try to learn more. The type of carry that goes long higher yielding currencies and short lower yielding currencies can be found as part of many funds that include the terms market neutral, absolute return and global macro in their names and that seems a little more reliable than the other carry because there is some fundamental element in there to account for at least some of the return.
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2 comments:
Was listening to a podcast on trend. I think it was top traders unplugged, and they mentioned RSST performance this year to date. Noted that by quartiles, levering up trend on top of beta seemed to improve the bottom and top quartiles heavily, leaving the mid quartiles mixed.
The Return Stacked team had a recent podcast discussing trend MF + Carry + market equity beta and it seemed to suggest that CAGR was improved and vol (very) slightly lowered. Certainly seems the MF Trend is much more diversifying (e.g. crisis alpha) in the way investors desire, but perhaps carry helps out those middle quartiles of just MF trend + beta more.
I bought a decent of amount of RSSY, but not sure if I should own as much as MF Trend. I've personally decided to soon invest in DUNN in my solo 401k, but am looking to continue to contribute so that not too large of a portion is in their high vol MF (i think they target 22-24% vol in dunn?).
As you mentioned as well, some of the managed futures mutual funds or ETFS include carry (I believe Simplify CTA does).
Also, wonder if we would have been better off with a fund that netted trades between RSST & RSSY--the Resolve guys even mention how netting trades between their different carry portfolios within RSSY increases efficiency by decreasing trading costs. Of course you mention on other posts that these all-in-one diversified portfolios (even Faber's) never seem to perform as one would hope doing it yourself.
I am leery of these very complex funds. I believe AQR is good at these blends but the others haven't proved themselves very well. RDMIX seems to be very unreliable for example.
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