Managed futures
May 13th, 2011
This year sees most major markets in the doldrums. A few weeks of progress can be wiped out and more by a few hectic days of panic. Japan rose at the beginning of the year, and was then cruelly dashed by the tsunami. Commodities soared, but have now had two severe bouts of sell off. India and Brazil have been out of favour. Europe has been in the black, but another Euro crisis beckons.
In such conditions some investors look around for something more exciting or for some style of investment management that promises returns when all about us we see little money being made on normal investments. Some argue that these are the conditions for Managed futures.
iShares have launched a fund that seeks to offer Managed futures type performance. We have been looking at it, to see if it could do the job of providing positive returns against a background of flat or falling markets. Whilst we wish it well, and see that it might make its clients good money, we have ruled it out owing to the nature of the Managed Future investment world it draws from.
The iShares US website states clearly that “The iShares Diversified Alternatives trust is not a standard ETF. The Trust not an Investment Company registered under the Investment Company Act of 1940. Shares of the Trust are not subject to the same regulatory requirements as mutual funds. The Trust is not intended to track the performance of any Index or other benchmark. Investment in shares of the Trust are speculative and involve a high degree of risk. Before making a decision you should carefully consider the risk factors and other information included in the Prospectus”.
These risk warnings point to extremes but they do help illustrate what we mean when we say there are ETFs and ETFs. We divide ETFs up into complex and non complex ETFs and stick to the non complex ones. This is definitely in the complex list. It is a fund which may do well for its holders, but it is for professionals who understand its complexity and like its risk management.
The fund in common with many Managed futures funds invests in long and short forwards and futures spanning both commodities and financials, using indices and interest rates. At a recent date it had $119 million in liquid collateral and cash. Against this it held $146 million in long futures, and $67 million in long forwards, whilst also holding $143 million in short futures and $41 million in short forwards. The fund, as this shows, gears and uses leverage. The fee rate is 95 basis points, higher than most non complex ETFs, to reflect the additional management involved.
The risk factors listed on the iShares site for the fund include the following:
“Prices of futures and forward contracts are volatile and even a small movement may result in large losses. The trust uses leveraged investment techniques in seeking to achieve its investment objectives. Leverage causes the value of shares to be more volatile than if the Trust did not use leverage. The trust has no mandatory holdings allocation requirements. Accordingly at any given time the Trust may be disproportionately exposed to one or more markets, asset classes or contract counterparties. You may lose all or substantially all of your investment in the shares”
We wish iShares well with this more exciting product. With careful management of leverage, and balancing of short and long positions, it may well be possible to generate worthwhile returns. The iShares version of Managed futures is easier to follow than some of the pure Managed futures funds, and probably competitive in total costs and charges as well. We just prefer to stick with simpler products without gearing and leverage, and so have not invested in any Managed futures. As the risk warnings remind us, you can lose a lot more money if the fund you are in is geared or short of too much if the manager made a mistake or if there was a sudden and unpredictable shift in conditions or if counter party banks got into trouble.
Data Sourced: http://us.ishares.com as at 13.05.11
