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Here's Why Advisors Should at Least Consider Managed Futures

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Managed futures may be pooh-poohed by some investment advisors as being “too risky,” but the truth is some of these funds are well managed and understand risk management better than many equity managers.

The annual Pinnacle Awards, presented by the CME Group, the largest futures exchange in the world, and BarclayHedge, the decades-old research and data firm, recognize the best among managed futures funds.

Some might see the awards, held this year at the Four Seasons Grand Ballroom in Chicago with Dennis Miller as host, as another back-slapping event for an industry group that likes to get some attention. But the selection process isn’t a pay- to-play. It’s done through quantitative performance metrics typically used by investors.

Through interviews and surveys with more than 100 asset allocators, the Pinnacle committee determines the criteria most useful to asset allocators to select commodity trading advisors (CTAs) and how they rank in performance.

(Related on ThinkAdvisor: How to Invest With the Best and Brightest Commodity Traders)

This year, the top five measurements used to rank managers were correlation (to relevant indices), length of performance history, minimal drawdown (a lower magnitude of loss compared to other for given time period), net returns and risk-adjusted returns.

Sol Waksman, an industry veteran who heads BarclayHedge, noted, “All of the winners and nominees of the 2016 Pinnacle Awards have done an excellent job in what is widely recognized to have been a very difficult period for CTAs.” Here are some of the standout award winners.

Eckhardt Trading Company 

Industry veterans William Eckhardt and Richard Dennis, having had successful trading companies and track records going back to the 1980s, were awarded the Pinnacle Achievement Award.

Today Dennis trades for his own account, but Eckhardt Trading Company, founded in 1991, has $363 million under management. Its Standard program, launched that same year, has had a cumulative total return of 2124%, a compounded annual return of 13.3% and a Sharpe ratio of 0.55, according to BarclayHedge, which provided all the data used for the Pinnacle awards.  Although the diversified futures fund lost close to 9% in 2015, it’s up 7% through May of this year and finished 2014 up close to 15%.

Eckhardt and Dennis, who both started in the futures business as floor traders, also created the so-called “Turtle System,” which trained several potential traders early on, many successful in their own right today. Futures lore has it that the Turtle project was a nature vs. nurture bet that the film “Trading Places “was based on, but that’s never been confirmed.

Tianyou Asset Management

Another standout winner at the Pinnacle Awards was Tianyou Asset Management, which won for best Emerging CTA and Best Options Strategy. Bill Zhan’s Tianyou Fund has had a compounded annual return of 35.62% since the fund started in 2012.

Every year it has had double-digit returns: 13.21% in 2012; 45.63% in 2013; 38.14% in 2014; and 38.01% in 2015. This year the fund is up 4.85% through May.

These are amazing returns considering that many CTAs had a tough ride during those years and perhaps deserve the 2% management/20% incentive fee, which is a throwback to the old days of managed futures. The fund’s worst drawdown was 16.6%, and its monthly standard deviation is 3.47 and Sharpe ratio 2.64

The Tianyou Fund focuses on writing short-term options on index futures that are “believed to expire worthless with over a 90% probability based on technical and fundamental analysis.”

Spendor Capital Management 

Spendor Capital Management Ltd., based in Shenzhen, China, took home the Best Diversified CTA (with less than $500 AUM) and Best 3-Year Hybrid CTA.

Its Credence Global Fund uses relative value strategies in the Chinese, U.S. and global commodities markets. 

Those strategies identify and capture likely changes in the price relationship between related or similar assets in the same or different markets. The fund has a compounded annual return of 18.54%, a monthly standard deviation of 1.86 and a Sharpe ratio of 2.87. 

It has never had a losing year since its launch in 2011 and its worst drawdown was 3.87%. In 2015, when many managers, in derivative and equity markets, were flailing, Splendor was up 27.96%.

Two Sigma

For those more interested in mega funds, Two Sigma won for 5-year best diversified CTA with more than $500 million in AUM. The group’s Compass U.S. fund, with $9.4 billion under management (the firm has a total $35 billion in AUM), is a systematic, globally focused program that targets absolute dollar-denominated returns.

Since its launch in 2005, Two Sigma has generated a 437% total return, 16% compounded annual return, with a monthly standard deviation of 2.85, a Sharpe ratio of 1.48, and a worst drawdown of 9.85%. Unfortunately for asset allocators Two Sigma requires a $1 million investment minimum and charges a 2% management fee and 20% incentive fee.

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