I have to confess to a guilty secret. I have broken not one but three of my own rules by buying shares in a new listed hedge fund from BlueCrest called BlueTrend.
The most important rule involved a stop I placed on new purchases for my self-invested personal pension (Sipp) portfolio over the late spring and early summer – I introduced this because I think markets are in a thoroughly bearish mood, with much volatility to come and a possible breach of 5,000 for the FTSE 100.
The next broken rule is to steer away from funds that are effectively “black boxes”. The final rule is to avoid funds where the manager charges 2 per cent a year and 20 per cent for supposed “all-weather” alpha or skill. My purchase of shares in BlueTrend – ticker BBTS – breaks all three.
Now, I’m willing to bet that virtually no one will know that this fund listed back in March – the IPO on the London Stock Exchange (LSE) was incredibly low- profile. The listing raised about £165m, which was then invested in the firm’s systematic trend-following offering called BlueTrend – this is a $14bn Commodity Trading Advisers (CTA) Cayman Islands-based master fund that has returned 16.6 per cent a year since launch in February 2005.
Like most systematic funds of this type, the managers invest in more than 150 markets including currencies, commodities, fixed-income and equity indices. In simple terms, traders look to manage a wide range of futures options in all manner of underlying asset classes, all the time looking for a profitable strategy or “trend”. So, safe to say that there’s a few black boxes lurking inside the engine room of this fund (alongside the usual 2 and 20 fees).
My decision to break not one, but three, of my own rules isn’t based on any enthusiasm for the dark arts of managed futures, systematic trend following and CTAs. As you’re about to discover I have severe doubts about the merits of futures trading, but it’s also true that I have invested in managed futures funds before (Winton) and I can only say that the ensuing results were all I could ask for – relatively steady returns in all markets.
Obviously, not all CTA managers are the same and there’s a wide variety of different strategies. The main divide is between systematic trend followers (using lots of quant-driven ideas) and discretionary futures traders, where decisions are made by the trader on an individual basis. Crucially, there’s evidence that some systematic CTAs are moderately better at market timing than most other fund managers, which could be useful in markets experiencing extreme movements such as, say, in the next few months if Greece does drop out of the euro.
For a positive summary of why investments like managed futures can deliver benefits for a diversified portfolio, I can find nothing better than a report by Cass Business School’s Harry Kat (the paper can be downloaded at tinyurl.com/bsqnpx5) and a US research report by Shana Orczyk from Peak Financial Management (at tinyurl.com/cko43g7).
But it’s also safe to say that I’m far from convinced by all the claims made by CTA enthusiasts. Most of these specialised funds have underperformed their hedge fund peers over the past few years, as markets have failed to offer up many medium-term trending opportunities – the problems of Man Group’s AHL structure (a peer) are now the stuff of legend.
The truth seems to be that futures traders appear to prefer markets that are more volatile, rather than “range-bound”. Also, I’m more than a little suspicious about the claims of amazing outperformance for the “strategy” over the long term – I suspect that whatever data are deployed betray survivorship bias.
One academic report by Andrew Lo, an economist from MIT, (at tinyurl.com/bvoqt7m) noted that CTA and managed futures funds have a terrible “failure rate”, with 14 per cent of total funds closing every year. In the high-octane information technology powered world of trend-following, one suspects that it really is a case of winner takes all.
So, why did I purchase my shares? In short, CTAs are in many ways like any other active fund manager and although most fund managers don’t produce the goods, a talented few do provide some added value, particularly in markets that are likely to be more volatile. As long as you don’t bet the house on this space, the trick is then to find talented managers such as BlueCrest that boast an easy-to-access vehicle on the stock market with a robust discount control mechanism.