#106: Is there an alternative to alternatives?

S2N Spotlight

A decade or two ago, hedge funds were all the rage. They were the masters of the investment universe, and saying you worked at a hedge fund was like today’s FinTwit influencer saying he has 100,000 followers (oi vey). I am not saying that working at some of the mega hedge funds today is not cool; there are some names to which most of us would donate a kidney just to sit on their trading floor and eat their Michelin chef-inspired lunches.

As you can see in the table below performance for the Top 50 Managed Futures Hedge Funds have underperformed the broad S&P 500 equity index over the last 10 years in almost every performance metric.

It is tempting to want to ignore this asset class based on its past 10 years of under performance. However, what I try and do in these letters is provide a longer perspective that incorporates more of the business and secular economic cycles in the way I look at the market, to provide a more informed decision. In the table below with 54 years of data we see tremendous outperformance by the Managed Futures Top 50.

With the data I have presented above I have not discussed the issue of performance fees and what data I am using to measure Managed Futures performance. This is a big subject and today is not the time to go into too much detail. I will say the following:

Managed Futures hedge funds typically charge 1-2% annual management fee and a 20% performance fee above a high water mark. The Barclays Top 50 Managed Futures Index whose data I am using does not factor performance fees into their index. This is a major flaw in my opinion which makes the ability to draw firm apple to apple conclusions difficult.

However, there has been a very exciting development in the Managed Futures space with Andrew D Beer the pioneer of this new branch of the industry promoting ETFs and other investible instruments that are synthetic constructions of the Managed Futures index without the typical performance fee costs. I have used his iMGP DBi Managed Futures Strategy ETF as part of my data from its inception date, with the Barclays data backfilling prior to the ETF’s inception date.

While I am a trader myself and want to share strategies that have an above average ability to achieve superior risk adjusted returns. The truth remains that most traders or hedge fund managers under perform an index over a decent length of time. With this in mind I think allocating to this new breed of managed future ETF like symbol “DBMF” is an exciting new innovation to the investment allocation industry. I recommend you do your own homework. It also doesn’t discourage me from pursuing my own strategies but prudence would tell you that diversification is the smarter play.

S2N Observations

In letter #99 on July 11, I wrote: “Over the years, I have observed that when a negative story of a public figure doesn’t go away, the pressure usually mounts to a breaking point. I think we are hours, days at most, away from a Democratic Party announcement that President Biden is dropping out of the presidential election.” The assassination attempt 2 days after writing this, required a united country, so the inevitable was delayed.

I wrote this past Friday in letter #105: “The assassination attempt on Trump delayed things a bit, but I am pretty sure he is days away from throwing in the towel.” I really went after this forecast, which I don’t typically do with regards the markets. I usually have a view but have little to no clue on timing, so I would ordinarily be reluctant to commit to a prediction that has to play out in a few days.

However, when it comes to people watching, there is definitely more of an edge to making forecasts when someone is about to be dumped. If you have followed the news for a long time, you can just tell when a story picks up momentum and won’t go away. In fact a good tell sign is that it doesn’t fade but grows in momentum. It happens with business leaders, politicians, teachers, or any position of leadership.

Someone mentioned to me that the Dow Jones Industrial Average Index is still below its high’s of a few years ago. So I recreated the chart to double check and yes a new high has not been confirmed. I wonder if this is an indicator with some signal?

My last comment for today, when you look at Friday’s performance in the table below it looks redder than the red sea. The VIX is up +30% for the month. Keep an eye out for Bitcoin it seems to one to take another run at an all-time high.