Managed Futures/Macro funds reported investor outflows throughout 2014, ending the year down $35.06 billion and $19.13 billion, respectively. So, clearly the performance of these funds must have been sucked big time, right?
Yeah, um, not so fast.
On January 8, HFR reported that Macro/CTA funds had posted their 8th gain in 9 months, ending the year beating all other hedge fund strategies. In fact, they were one of the top performing strategies in the first quarter of the 2015, too.
And just like that, the chase was on. eVestment reported that Managed Futures and Macro hedge funds gained $14.18 billion and $4.01 billion in AUM, respectively, during the first half of 2015.
Ah! We fickle investors! Pretty soon we’ll probably just have a Tinder app for hedge funds and skip due diligence and asset allocation all together. The app will display only past performance and allocate straight into the limited partnership from your bank account. I smell a unicorn.
Swipe right if you agree.
(c) MJ Alternative Investment Research
It seems to be human nature to chase performance. Whether it’s due to overconfidence, miscalibration, Dunning-Kruger, familiarity, the disposition effect or simple greed and fear, we appear to be hard wired to make decisions based on past performance. Even if we know that PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS - or, as I like to put it, you ain’t gonna get what they got, you’re gonna get what you get. Unfortunately, the SEC isn’t keen on my translation, yet.
Now, don’t get me wrong. I loves loves loves a CTA/Macro fund. I wrote a paper when I was at Barclays showcasing the reasons why diversifying strategies such as these deserve permanent placement in a portfolio (and 2014 plus the last three days kinda proved my point), so it’s not that I’m anti-quant, systematic, macro, trend followers or anything else. And frankly, given the way the market has behaved over the last several days, this may be one of the few times when return chasing may actually work for investors.
Regardless of my personal biases and whether we’re about to enter the next great Stockapalypse, I do think it’s a good time to remind everyone that performance chasing is generally not a great strategy for great returns.
First off, all investors, no matter how large a pool of capital they command, are resource constrained to some extent. The amount of staff they have available for investment due diligence, operational due diligence and ongoing monitoring tends to be fairly finite. When you chase returns, you generally have to transfer resources from what one would assume is a rational investment plan to what amounts to a fire drill. At the end of the day, this can make your long-term investments suffer in favor of short-term (potential) gains.
And perhaps more importantly, return chasing simply doesn’t work. Studies of both retail and institutional investors show that fired fund managers often go on to outperform their replacements. In one Vanguard study, the average outperformance of a buy and hold investor versus performance chasers was 2.8 percentage points. In another (S&P/Dow Jones) study of U.S. equity mutual funds, past performance was not a predictor of future results 96.22% of the time.
In the alternative investment space, if you look at HFR’s Winner’s and Losers chart (you know, that colorful quilt like chart they produce annually) from year to year, it is rare to find a strategy in favor for more than 24 months at a time. Last year, it was CTA/Macro, the prior two years it was the S&P 500. 2011 saw Barclays Gov’t Credit in the lead. In 2010 the S&P 500 emerged victorious again. 2009 saw relative value – convertible win the race. 2008 was another win for Barclays. In 2007, it was emerging markets funds. In fact, Macro/Futures funds were in the bottom two strategies in 2012 and 2013 before topping everything else in 2014.
Let’s face it, past performance is not your friend, it’s your frenemy.
There are a lot of ways to make investment decisions that don't rely solely, or even primarily, on past performance of a particular fund or strategy. The outlook for the strategy, the qualifications of the manager, your own risk-reward mandate and parameters as well as a holistic portfolio plan can all be great guideposts during the investment selection process.
Hell, you might even take a (gasp!) contrarian approach.
I was speaking with an investor on Monday morning when the Dow was down about 1,000 points at open. While lamenting the loss, they also stated “well, at least it’s a good buying opportunity.” Those words made me want to do a little dance, make a little love, and get down on a Monday night (uh uh, uh uh). After all, our mantra is still buy low, sell high, not the other way around.
Oh, and PS - So proud I made it through that entire blog without an "I told you so" moment. Oops. Damn.
Sources: HFR, S&P Dow Jones, Vanguard, eVestment
