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Managed futures getting obsolete

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Returns of managed futures are at generational low. This is not a cyclical event; it is a structural change. Managed futures are getting obsolete. Technology has reduced transaction costs and data feed costs manifold. Futures, alongside with stocks, forex, ETFs have become accessible to virtually any investor directly. One can trade and execute strategies on electronic platforms bypassing any human contact, like broker or advisor. They can tail-ride traders, investors or signal providers on services like zulutrade.com, collective2.com or covestor.com. More and more investors do this changing markets in the course.

Consequently, the price behavior has become more fragmented. There are no 1970s type trends that can be captured by simple, often including elements of pyramiding, trading strategies (like one I have written about here). Today successful strategies are more specific and with shorter time span. Traded by an insider of any specific industry (biotech, industrial machinery etc.) or some technies in high frequency trading aiming to access signal a few milliseconds faster etc. Due to fragmentation, a single manager (and this includes institutional managers) is too limited in scale and scope to benefit from such more competitive niche strategies. For typical money manager many top-performing niche strategies have too limited market size (say, how US$25 billion Winton Capital Management can profitably capture a top-performing strategy with US$ 50 million capital deployment limit) or too short life span (can a typical hedge fund make a complete strategy overhaul every 3-6 months) or lack of institutional capacity to manage large number of diverse strategies (there is a limit on how many strategies one person can develop and maintain); and this is even before talking about legal restrictions of offering memorandum.

There is little managed futures can offer in terms of cost improvement (everyone can trade cheap on virtually any scale) or access to investment (even a small investor can trade all the spectrum of futures), so managed futures are even in more competitive area than mutual funds or hedge funds. But it is clear that the key drawback comes from the very asset management structures with their inflexibility (due to both legal and organizational issues) in regard to strategies employed, an inflexibility that renders managed futures (and all other mainstream investment vehicles) unsuitable for today’s markets.

Disclaimer: We’re working on development of a web-based service to enable sourcing and dynamic application of trading systems to meet the challenges of the modern marketplace. The traditional business entities like banks, mutual funds and hedge funds are not fit anymore to provide such investment service with consistent profitability to investors.

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Written by A.S.

October 2, 2013 at 11:28 am

Posted in managed futures

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