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.
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%.
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.