Monday, December 23, 2013

Are Managed Futures a License to Steal?

By Geng Deng, PhD, CFA, FRM and Craig McCann, PhD, CFA

Bloomberg’s David Evans raised this question in his recent Fleeced by Fees. David found that 89% of the futures trading profits and interest on collateral in 63 SEC-registered managed futures funds from 2003 to 2012 were consumed by fees and commissions. David’s story shines a light on the abusive fees charged by the managed futures partnerships. His story quotes a spokesperson for the National Futures Association self-regulatory organization / trade group as saying that “We can’t just give investors all the answers.” Thankfully, his follow up story last week reports that the CFTC has opened an investigation into the high fees and so more useful information might be on the way to investors soon.

We’ve been working on this story ourselves for a while now and find substantially the same results as David. The table below lists the investment income (including futures profits and interest income) in 93 SEC-registered managed futures funds from 2003 to 2012. This sample is a little larger than David’s primarily because it includes some funds that didn’t survive to the end of 2012.

Our 93 filers reported $2.37 billion in interest income and $9.63 billion in futures trading profits for a total of $12.0 billion in investment returns from 2003 to 2012. The firms deducted $10.42 billion in fees and commissions (87% of the investment returns) and distributed only $1.59 billion (13%) to investors. As if that wasn’t evidence enough that the registered managed futures funds are robbing investors, consider this: the interest on the collateral was $2.37 billion. That is, the registered managed futures funds on average paid out none of the $9.63 billion in futures trading profits and only two-thirds of the interest earned on the low risk collateral purchased with investors' capital. Investors would be far better to have invested in a diversified bond portfolio than to invest in a managed futures partnership.

We’ve embedded links to each filer’s SEC filing. Click on the name of the filer and you will be taken to the SEC Edgar page where you will be able to view the source document Form 10-Ks.

Company NameReport YearsInvestment Income
(A)
Fees
(B)
Net Income (A-B)Fees
(B/A)
AAA CAPITAL ENERGY FUND L.P. 03 to 124957129210540360719
AAA CAPITAL ENERGY FUND L.P. II 03 to 1274918616033658885021
AAA ENERGY OPPORTUNITIES FUND LLC11 to 12649215531-9039239
AIS FUTURES FUND IV LP05 to 1258545244733407242
ALPHAMETRIX MANAGED FUTURES III LLC10 to 1226336428-3795244
ALPHAMETRIX MANAGED FUTURES LLC07 to 122333124216-886104
ALTEGRIS QIM FUTURES FUND, L.P.09 to 121899720170-1173106
ALTEGRIS WINTON FUTURES FUND LP06 to 121740891368123727879
ASPECT FUTURESACCESS LLC05 to 12164631909397369255
ASPEN DIVERSIFIED FUND LLC05 to 122111915186593272
ATLAS FUTURES FUND LIMITED PARTNERSHIP03 to 1134225235441068069
BEACON FINANCIAL FUTURES FUND LP05 to 06106175-69165
BLACK ROCK FUTURES INVESTMENTS LP03 to 051700214939206388
BLACK ROCK PRINCIPAL PROTECTION LP03 to 0549173744117376
BLACKROCK GLOBAL HORIZONS I L.P.03 to 12169845180028-10183106
BRIDGETON GLOBAL DIRECTIONAL FUND, LP07 to 121018817508-7319172
BROMWELL FINANCIAL FUND LP03 to 11203718-516354
CAMPBELL ALTERNATIVE ASSET TRUST03 to 1029979129831699643
CAMPBELL FUND TRUST03 to 123936162966409697675
CAMPBELL STRATEGIC ALLOCATION FUND LP03 to 122498688233989815879194
CITIGROUP FAIRFIELD FUTURES FUND L P03 to 073508340569-5486116
COMMODITY ADVISORS FUND L.P. 09 to 123155468-51521734
DIVERSIFIED 2000 FUTURES FUND L.P. 03 to 12118280993131896784
DIVERSIFIED FUTURES FUND L.P.03 to 0717163536-1820206
DIVERSIFIED FUTURES TRUST I03 to 081316111210195185
DIVERSIFIED MULTI-ADVISOR FUTURES FUND L.P. 03 to 1255543440561148779
DIVERSIFIED MULTI-ADVISOR FUTURES FUND L.P. II 03 to 1263672488571481577
EMERGING CTA PORTFOLIO LP 05 to 12109362900981926482
EVEREST FUND LP03 to 122661024955165594
FAIRFIELD FUTURES FUND LP II 04 to 12136011407329527830
FRONTIER FUND09 to 122400472389681079100
FUTURES PORTFOLIO FUND L.P.03 to 126443065599928431487
FUTURES STRATEGIC TRUST05 to 082800180899365
GLOBAL DIVERSIFIED FUTURES FUND L.P. 03 to 1254510360321847966
GLOBAL MACRO TRUST03 to 124670824526351444797
GRANT PARK MANAGED FUTURES STRATEGY FUND03 to 12419527488111-68584116
GREENHAVEN CONTINUOUS COMMODITY INDEX FUND08 to 122138916997439279
HENRY JOHN W & CO/MILLBURN L P03 to 061099711087-89101
HIGHBRIDGE COMMODITIES FUTURESACCESS LLC11 to 12-90162188-11204-24
KENMAR GLOBAL TRUST05 to 0945255578-1054123
KMP FUTURES FUND I LLC10 to 1233627643-4281227
LV FUTURES FUND L.P.07 to 123507967-76162273
MAN AHL DIVERSIFIED I LP09 to 12-3785068476-106326-181
MAN AHL FUTURESACCESS LLC10 to 12-29933837-6830-128
MANAGED FUTURES CHARTER GRAHAM L.P. 03 to 123710403201715086886
MANAGED FUTURES PREMIER ABINGDON L.P. (FILER)07 to 126945267677177597
MANAGED FUTURES PREMIER AVENTIS II L.P. 05 to 121822961375774471875
MANAGED FUTURES PREMIER BHM L.P. 10 to 12-6444932465-96914-50
MANAGED FUTURES PREMIER WARRINGTON L.P. 06 to 121436781127943088479
MERITAGE FUTURES FUND L.P. (FILER)07 to 128396897-6058822
ML BLUETREND FUTURESACCESS LLC08 to 1269193337043548949
ML CHESAPEAKE FUTURESACCESS LLC07 to 07-4087977-5064-24
ML CORNERSTONE FUTURESACCESS LLC05 to 07-1313513074-26209-100
ML TRANSTREND DTP ENHANCED FUTURESACCESS LLC07 to 1284421470543736756
ML TREND-FOLLOWING FUTURES FUND L.P.03 to 1237624315094-277470837
ML WINTON FUTURESACCESS LLC05 to 1249442126495622946554
MLM INDEX FUND03 to 123706855471-18403150
MS DIVERSIFIED FUTURES FUND L.P.03 to 07-432223089-27411-534
MS PORTFOLIO STRATEGY FUND L.P.03 to 07331628152-24836849
MSSB CHARTER ASPECT L.P. 03 to 1279819119209-39390149
MSSB CHARTER CAMPBELL LP 03 to 12150762168246-17483112
MSSB CHARTER WNT L.P. 03 to 126580462089371594
MSSB SPECTRUM CURRENCY & COMMODITY L.P. 03 to 12284082296-794562898
MSSB SPECTRUM GLOBAL BALANCED LP 03 to 122263520567206891
MSSB SPECTRUM SELECT LP 03 to 125061134390766703787
MSSB SPECTRUM STRATEGIC LP 03 to 122097901692794051181
MSSB SPECTRUM TECHNICAL LP 03 to 12490339498672-8333102
MORIAH FUTURES FUND LLC03 to 03-30170-199-573
NESTOR PARTNERS03 to 12128074455478252736
NUVEEN DIVERSIFIED COMMODITY FUND08 to 122256590631350240
NUVEEN LONG/SHORT COMMODITY TOTAL RETURN FUND11 to 12-165411363-17904-8
ORION FUTURES FUND LP 03 to 1256529032339624189457
ORTUS CURRENCY FUTURESACCESS LLC12 to 12-40251176-5201-29
POLARIS FUTURES FUND L.P.07 to 12-369024642-28332-668
POTOMAC FUTURES FUND LP 03 to 1297888109654-11766112
PRICE FUND I LP04 to 06441712-271161
PROVIDENCE SELECT FUND LP06 to 085651146-580203
RICI LINKED - PAM ADVISORS FUND, LLC09 to 1272719102956242514
RJO GLOBAL TRUST05 to 121080879916-69108739
ROGERS INTERNATIONAL RAW MATERIALS FUND LP03 to 122570317081862266
SENECA GLOBAL FUND, L.P.08 to 12240013705-11305571
SMITH BARNEY MID WEST FUTURES FUND LP II03 to 0724519097-6646371
SUPERFUND GOLD, L.P.09 to 12129476968598054
SUPERFUND GREEN, L.P.03 to 127928485639-6355108
SYSTEMATIC MOMENTUM FUTURESACCESS LLC07 to 123493083603-48672239
SYSTEMATIC MOMENTUM II LLC06 to 08132005932726845
TACTICAL DIVERSIFIED FUTURES FUND L.P. 03 to 126951746528414233294
TEUCRIUM COMMODITY TRUST10 to 12177138520919448
TIDEWATER FUTURES FUND LP 04 to 121258042561-29981338
TRIVIEW GLOBAL FUND, LLC05 to 12-30638-668-2119
TUDOR FUND FOR EMPLOYEES LP03 to 0373141999531527
WESTPORT JWH FUTURES FUND LP 03 to 124127973810-32531179
WITTER DEAN DIVERSIFIED FUTURES FUND II L P03 to 05-6411847-2488-288

David’s story discusses at some length the Campbell Strategic Allocation Fund. Over the decade it had $2.5 billion in investment returns but deducted $2.34 billion in fees and commissions leaving investors with only 6% of the returns for bearing the risk of the futures trading on the collateral purchased. The Campbell Strategic Allocation Fund collateral alone earned $760 million and so investors received only about 20% of the returns on the fixed income collateral and none of the profits from the futures trading.

There are other great examples of what is a ubiquitous pattern of excessive fees.

The 29 registered managed futures partnerships managed by Morgan Stanley’s affiliate, Ceres, had gross returns of $5.4 billion but net returns of only $1.3 billion after $4.1 billion in fees were deducted over the 10 years from 2003 to 2012.

Annualized gross returns to the Ceres funds were 10.0%, expenses were 7.9% and net returns only 2.1%.

During the same period, S&P stocks' annual return was 7.0%, beating the Ceres managed futures partnerships 9 out of 10 years.

Municipal bonds during the same period had an annual tax free return of 4.8%, and taxable bonds 5.1%.

Ceres Managed Futures Partnership Returns, 2003-2012 (in millions)

The expected gross return to a fully collateralized futures position is the return to a cash investment plus whatever compensation is required for the risk borne in the collateral investment. For stocks and stock index futures this is the expected return on the stock market. For other underlying investments, the expected returns are less. The expected gross return to actively managed futures is also equal to the expected returns to actively managed cash investments. Given this simple arithmetic, a managed futures investment with 7 to 9% annual expenses on average will earn much less than combinations of stocks and bonds over time because of the extraordinary withdrawals taken by the industry each year from investors’ capital.

The clear answer to the headline answer is, Yes.

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