The Toxic Cycle Sync: Emotional Investing and Managed Futures Performance Cycles
By Attain Capital
Our weekly newsletter is out, and this week we’re going into a bit more detail on one of the most common investing mistakes: performance chasing. As is the case in every asset class under the sun, managed futures investors love to chase performance. The sustainability of a strategy often comes second to double or even triple digit returns. We do our best to discourage such decision making, because in our experience, this is uniquely damaging in managed futures allocations.
The fact is that drawdowns – or extended periods of severe losses – are a fact of life for managed futures investors. There is no way to avoid them; every program goes through them. But in our experience, performance tends to be cyclical for quality programs. They will have a run up, face a drawdown, experience a recovery period, and repeat the process all over again. An investor making allocations at the peak of a run up period usually sets themselves up for losses in the short-term – losses that typically don’t sit well with an investor who was chasing returns in the first place.
However, we’ve found that the best way to explain the significance of such cycles to investors is to show them how it’s happened in the past. In 2010, we did just that, looking into the performance cycles of Clarke Capital. However, with the overarching trend of the asset class’ performance cycling between up and down years being called into question by back to back losing years, and a great deal of the trend following space in drawdown, we thought it would be helpful to take a closer look. Here, we examine the reasons why investors chase performance, the cycle they step into when they do, and what that looks like in an individual track record.
Spoiler alert: it ain’t pretty.
- - - - - -
To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive and our Managed Futures Blog.
DISCLAIMER
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
Managed Futures Disclaimer:
Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
Copyright © 2011 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved. Reprinted with permission.
