Several days ago, Bloomberg wrote a scathing article on Managed Futures Funds. These funds are fairly complicated, but most follow a strategy called “trend following,” in which they buy as things are going up and sell as things are going down. It is obviously much more complex than that, and they use computer algorithms to determine their trading, but the general gist is a momentum-based strategy. These funds started to gain much more popularity after 2008. They tend to be non-correlated to the overall market, appealing to investors after losing over half their money in the stock market.
Bloomberg’s reporter does an absolute takedown of these funds. Here is an excerpt:
Clients jumped in. During the decade ended in 2012, more than 30,000 investors entrusted Morgan Stanley with $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. The fund already had $341.6 million invested during the previous eight years.
Top fund managers speculated with that cash in a wide range of asset classes. In that period, the fund made $490.3 million in trading gains and money-market interest income. However, investors who kept their money in Spectrum Technical for that decade reaped none of those returns — not one penny. Every bit of those profits — and more — was consumed by $498.7 million in commissions, expenses, and fees paid to fund managers and Morgan Stanley.
After all of that was deducted, investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.’s 500 Index Fund, they would have reaped a net cumulative return of 96 percent in the same period.
We have written about how we’ve avoided these types of funds in the past. The story sounds great…” we make money no matter which direction the market is going!” which is only partially true. Over the past decade, these funds have made profits, but their fees end up consuming nearly all of those profits.
When will investors learn that complex, high fee products nearly always fall short of expectations? These are some of the most expensive lessons that investors have to learn. As investors, we are entitled to a market rate of return. Fees, excessive trading, taxes, and unsuccessful market timing strategies are all things that can reduce that market return. An investment strategy that attempts to remove those speed bumps tends to work best.
