Sometimes individuals invest in managed futures and expect consistent, steady returns from month-to-month and year-to-year; similar to rental property income. The reality is quite the contrary. Managed futures and CTAs are speculative investments (similar to Equities), and should not be relied on for “income.” Any investor that starts investing with CTAs with the expectation of the return stream being monthly and consistent will most likely be disappointed.
Portfolio managers at CTAs research new trade ideas on a constant basis. From that pool of ideas, a trade may be executed daily, weekly or monthly depending on the investment strategy. Because some trades are unprofitable, while others are profitable or breakeven, trading results tend to be quite inconsistent. In order to be successful, a CTA has to either have a higher percentage of winning trades versus losing trades, OR their winning trades have to be much larger than their losing trades. This characteristic of trading is what results in a CTAs’ performance being described as “lumpy” or inconsistent.
We like to set expectations with all prospective clients by advising them that most CTAs will make a bulk of their returns in two months throughout the year, and likely have two large losing months each year, as well. The balance of the 8 months will have returns that are “low” relative to the volatility in their track record. Here are two performance tables from two different CTAs:
In both examples above, you will notice that there are a few months each year that exhibit larger returns and drawdowns compared to the rest of the year. In the first performance table, October 2014 exhibited a large down month, but that was followed with December 2014 having a large positive month. Similarly, you will notice in the second return table that April 2011 exhibited a large negative month, but then that was followed up by August 2011 with an even larger positive month.
The moral of the story is that you have to go into these investments expecting that there will be months that have larger than normal drawdowns, and months of higher than expected positive performance (past performance is not indicative of future results). You should go into CTA investments expecting the returns in your account to be inconsistent, and realize that most of the alpha is captured during a few months out of the year.