Wed., July 28, 2010—We delve further into the statistics behind the rankings on our website twice a year to help answer the age-old question: What is the best managed futures program? That question is always a tricky one, because depending on who is asking it, that individual may want to know any one of several variations of what is best. Best this month? Best of this year? Best for all time? Best risk-adjusted return? Best in terms of lowest drawdowns?
Our managed futures program rankings have developed over the years into a comprehensive tool which ranks commodity trading advisors (CTAs) across over 25 different metrics measuring performance, risk, experience and more. The rankings are designed to measure which programs are the best across several statistics, then see which are consistently among the top ranked on each set of rankings and therefore the best overall.
This semi-annual newsletter highlighting the top 15 in our rankings goes a step further, listing the top 5 managed futures programs across several metrics, including year-to-date (YTD) performance, total return, lowest max drawdown, Sharpe, Sterling, Sortino and length of track record.
We list the top 5 programs in each category to not only show who has done well, but also to show that there is much more to being top ranked than just last year’s performance. We are not content to merely show you the best performers this year or a list of the top performers of all time, and instead want the rankings to reflect the risk of the program, consistency of returns and experience of the manager as well.
THE MANAGED FUTURES (CTA) PERFORMANCE IN THE FOLLOWING TABLES SHOW COMPOSITE PERFORMANCE AS REPORTED BY EACH CTA. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
We begin by looking at the number most people fixate on—year-to-date (YTD) returns—by showing which managed futures programs have performed best so far in 2010. This is unfortunately the measure most investors use to determine what investment is best for them, and the reason the year's hot system or CTA is usually regarded as the best. The downside to this analysis, of course, is that it ignores risk. A high return is nice, but at what cost. The best performers for the first half of 2010 can be seen in the figure below.
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While discretionary trader Dighton Capital has been among the best so far in 2010, a simple change to looking at total return over the life of the investment quickly inserts other, more traditionally managed futures programs into the top 5 lists, such as Abraham Trading and Hyman Beck, which despite below average performance recently remain big all-time performers. The best programs by Total Return have been the following:
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It’s easy to play devil's advocate when looking at the total return table and say how it unfairly treats newer programs and advisors. It admittedly takes a while to build up significant total return numbers; for that reason, looking at the compound rate of return (ROR) may be more telling. This measure is more of a "what you might be able to expect" than a "what has happened" measure. And sure enough, you will see that the Best by Compound ROR includes "newer" managed futures programs (newer is relative in this case, with a five year-old program newer than a 15 year-old program) like Emil Van Essen and Pere.
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But what if you think of best not as the one that surpasses all others, but rather the one which is most suitable for you. The question in that case should not be, “What is your best managed futures program?” The question should be, “What is MY best managed futures program?” or in a more grammatically correct form, “What is the best managed futures program for me?”
To find which managed futures program is the best for you, a little soul searching is required. Are you interested in the absolute highest return? Lowest drawdown? The best mixture of the two, perhaps? Or maybe you think the best managed futures program is the one which has been around the longest. There is surely something to be said for longevity. You will quickly find that different managed futures programs head many of these lists, showing that finding the best is an elusive target indeed.
To begin to filter things down, we must incorporate the riskiness of each CTA. Many investors look at drawdown to get a feeling of the risk involved. But concentrating solely on drawdown is just as bad as looking only at return. For starters, a CTA could have a very low drawdown because it has only been trading for a short period of time. The best managed futures programs for lowest maximum drawdown are listed in the chart below.
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But as nice as it is too see a low drawdown, low risk doesn't really help if there is also no return. One can always invest in treasury bills at 0.10 percent per year if he or she wants zero risk. The next logical step, therefore, is to evaluate which programs have the best return per unit of risk. This is accomplished through the use of several risk adjusted ratios. The first of these is the Sharpe ratio, which measures returns divided by risk (as measured by the standard deviation of returns, or volatility). The formula actually uses the amount of return over the risk free rate.
Attain uses a constant of 2 percent as the risk free rate of return in its calculations, despite the recent drop of T-Bill rates to near 0 percent. The managed futures programs with the best Sharpe ratios have been the following:
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One of the problems with using the Sharpe ratio is that it punishes systems and CTAs for having a high upside volatility profile. For example, the Covenant Aggressive program had a 21.5 percent gain in February of 2008, which caused the volatility reading for the program to jump higher. But it can be argued that upside volatility is of no concern, as that means large positive monthly gains in the distribution of returns. Does it mean an investment is more risky if it has a huge monthly gain? Usually not.
We think a huge monthly loss is much more important when measuring risk. There is a risk measure which eliminates the upside volatility skew from the Sharpe ratio by using the volatility of negative returns only. This measure is called the Sortino ratio. The best CTAs by Sortino ratio have been:
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The Sharpe and Sortino ratios have a flaw, however, in that they only view the volatility of returns as the main ingredient of risk. This speaks nothing of what sort of drawdown had to be encountered to get the return. As many managed futures investors can attest to, it is the drawdown period which represents the most risky part of the investment, not necessarily the volatility of returns. The Sterling ratio measures returns divided by risk (as measured by drawdown). The best managed futures programs by Sterling ratio can be seen in the figure belwo:
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One last piece if information it is important to take into consideration is the length of track record. The previous tables have looked at managed futures programs with at least 24 months of data, but measures such as the Sharpe ratio are usually computed on at least three years of data.
The shorter the length of a track period, the greater the margin of error in the statistics. Thus, how long a program and manager have been around means a lot. The longer someone has been at it, the more faith we can put in the stats. The best managed futures programs by length of track record are:
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So which managed futures programs are the best overall? It again depends on what you are looking for, but those which keep popping up in the tables above should definitely be candidates. We unfortunately do not have space to list the rankings for all 25 categories we examine, but the flag rankings on our website put all of these statistics together into a single mathematically derived ranking, with 5 flags being the best down to 1 flag being the worst.
All programs are ranked in each category, and then an overall ranking is computed. So a program which is ranked between No. 10 and No. 30 in each category may very well be ranked higher overall than a program which is ranked No. 1 in a single category, but averages in the 50s to 100s for the rest of the categories. The programs in the top twentieth percentile of all rankings are awarded a top 5-flag rating, with the higher listed program amongst two 5-flag ranking programs the one with a better ranking.
Without further ado, the top 15 managed futures programs monitored by Attain through the first half of 2010 are:
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The tables above show who the best in each category was for the period ending June 30, 2010. The rankings are based on Attain's expanded watchlist (those programs on our recommended list plus those programs currently being monitored for inclusion on our recommended list), and do not include the entire universe of managed futures programs. Only programs with at least 24 months of data and minimum investments of $2 Million or less were included, and only a single program is considered amongst a family of programs in which all that differs is the leverage amount.
*PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
To view the full risk disclosure, go to: http://www.attaincapital.com/managed_futures_newsletter/publish/391.
IMPORTANT RISK DISCLOSURE
Futures are often complex and can carry the risk of substantial losses. They are intended for sophisticated persons and are