Managed Futures Today Magazine

When Managed Futures Today began publishing the quarterly top 20 managed futures programs (see pages 6 and 7 of the Nxtbook version), we noticed some patterns in the results.  Some CTAs were top performers for consecutive quarters; other CTAs had multiple programs among the top 20 performers. One CTA — Fort L.P. — piqued our curiosity because it had two managed futures programs that consistently ranked among the top 20. So, we thought we’d ring them up and get the lowdown.

What we found were two Ph.D. economists — Yves Balcer and Sanjiv Kumar — with interesting ideas about the markets, trading, and managed futures. Fort L.P.’s two managed futures programs — The Global Diversified Fund and The Global Contrarian Fund — both have averaged more than 14% annualized return over the life of the funds.

MFT: How did the two of you meet and start a managed futures company?

Balcer: We met while working together at the World Bank in the 1980s. We were managing the bank’s $30 billion liquidity fund. At the time it was probably the largest multi-currency fund in the U.S.  It was mostly discretionary trading based upon economic analysis and market perceptions. After we left the world bank, we became very interested in trend following and did a lot of analysis of trend-following methods.

At that time most of the trend followers were former pit traders who had developed a very visual method of analyzing markets with charts. But we were trained as economists so we approached trend following from a more statistical analysis perspective. 

MFT: What did your statistical analysis tell you about the markets that a pit trader might miss?

Kumar: When we developed our trading programs we wanted three things. First, we wanted quantitative strategies because they allow you to suppress the human urges that make you go astray. Secondly we wanted strategies that were liquid. We don’t like things where you have to lock your money away. Lastly we wanted strategies that are statistically robust. The way to achieve that is to keep the number of parameters low so we don’t want to have more than two or three parameters. If you allow lots of parameters you can always make your model work really well in the past. But the point is to work well in the future.

Balcer:  Another advantage of keeping the model simple is that we can use more recent data for our analysis. A lot of traders use 50 years’ worth of data but we found that when you do statistical tests on data that is more than 10 years old, it’s not as powerful as more recent data. We tested our models to be robust and we think we have achieved that.  If you look at our historical performance, we’ve made roughly 18% per year over 18 years.  And it’s been a reasonably steady growth.

MFT: Your first fund was the Diversified Fund in 1993, followed by the Contrarian Fund in 2002. How do they differ?

Balcer: The Diversified Fund is a combination of our medium-term, trend-following model and our contrarian model, while the Contrarian Fund is only the contrarian model. The contrarian strategy is also medium-term and it is similar to a strategy that trades a channel around the trend.

Kumar:  From 1993 to 2002 we only used a trend-following strategy. But we thought that in addition to having a trend-following strategy which is late getting in and late getting out, maybe we can flip it on its head with a strategy that is early getting in and early getting out. By “early,” I mean that you are trying to anticipate the next move in the market. But that’s a very difficult task to achieve. What the contrarian strategy does is stay in the trend but try to take advantage of some of the wiggles around the trend. It produces returns that are not more or less than trend following; it’s just that they appear at different times so your profile looks different than a trend-following strategy. The ultimate goal of any manager is to have a variety of strategies so that you’re profitable in most periods.

Balcer: In December 2009 we incorporated a short-term, mean-reversion strategy into the Diversified Fund. In very liquid markets like equity index futures, there are lots of people who trade. When the market has a big move up a lot of people want to take profits, so there are natural sellers.  It’s the same way if the market has a big move down: there are lots of people who jump back in or short-cover. These are short-term reversals that you can take advantage of.  The short-term strategy is neither trend-following nor contrarian and has almost no correlation with the other two strategies. But its’ one weakness is that often trends can be very strong, so if you fade it too early, you can take a lot of pain. We’ve found that the right balance is about 45% trend-following strategy, 45% contrarian strategy, and 10% short-term strategy.

MFT: What markets do you trade?

Kumar: We trade the financials, energies, and metals. In the financials we concentrate in interest-rate products, stock indexes, and currencies.  We experimented with agricultural in 2002-2003, but we felt it was a mixture not liquid enough at the time (though liquidity is quite high nowadays), and the risk reward in agriculture was not as good as the risk reward you get from the other products.  And we feel that if somebody wants to have exposure to agriculture, there are better people than us to do it for you. 

MFT: Have any of the markets performed particularly well?

Balcer: If we look at our history over the last nine years, we probably outperformed our competitors because we were concentrated in the interest-rate markets and it had good rallies and reversals.  Our model was in sync with it.  We were about 50% exposed to interest-rate products and interest rates probably proved one of the easiest markets to trade over the last three years.  Our competition had a decent year in 2010, but probably linked more to commodities and equity indexes.  But in 2011, those markets had some shocks and their performance this year is mostly negative. 

MFT: Is a 50% allocation to one segment of the market typical in the funds?

Kumar: We allocate to markets based on the analysis of our model rather than allocating on an equal basis across markets. The downside to being skewed is that our day-to-day volatility is going to be higher. But being equally weighted doesn’t change your volatility at market extremes because at the extremes, everything goes wrong at the same time.  We focus much more on the extreme event periods. If the extreme event volatility isn’t going to go up that much and we can make more money being skewed, then we do that. The downside is you have a little more volatility on daily basis. We overweight allocations in markets where we’ve made money and we overweight a little bit where we’ve lost money. We underweight allocations in markets where we’ve neither made nor lost much money, because that is an indication there’s not much potential in those markets.

Balcer: Sometimes good allocation can be a bit counterintuitive. For example, let’s say our yen model makes good long-term returns but right now it’s down 30%. I might not have invested in it, but if I had, I’d be down 30%. This could be an excellent time to allocate to the yen model on the basis that it’s extremely bad recently it’s likely to come back very strong.

MFT: Do the two funds have different investor profiles?

Balcer: The Global Diversified Program tends to have investors who don’t have as many CTA investments and look at Fort L.P. as a core investment. These tend to be family offices, high net-worth individuals, and funds of funds that only have one or two CTAs in their portfolio.  Most of the large institutions have significant holdings in large CTAs and view Fort as a diversifier of their other investments; they have preferred the Global Contrarian Program. But given our performance in the last two or three years, combined with our long-term record averaging 18% for 18 years, many of them are looking at us as a core holding rather than just a diversifier.

Kumar: The way fund of funds construct their portfolios is to put 70% of their money in the five largest CTAs which tend to be trend followers. Since they are the largest CTAs, people feel very comfortable with them and they usually have long-term records. But the problem is since they are all trend followers, they’re quite correlated with each other and, as a result, the volatility can be quite high.  Fund of funds place the other 30% with non-correlated CTAs. That’s where our Global Contrarian Program comes in, because it makes money at different times than trend-following programs. So when people do their portfolio optimization, they find the Global Contrarian Program is a good fit to reduce the risk of the portfolio.

Kumar: In early 2008, we had a peak of assets of about $1 billion. Of that, $900 million was in the Global Contrarian Program and $100 million was in the Global Diversified Program. In the 2008 crisis most of the money in Global Diversified stayed in the fund. But the Global Contrarian Program took a hit because many fund-of-funds managers had to raise money to meet
withdrawals.

MFT: Which brings us to the usefulness of managed futures in an investment portfolio. Your thoughts on that?

Balcer: Managed futures is a very powerful investment tool because it makes money when the stock market is losing money. If you rank S&P 500 monthly returns from highest to lowest, you’ll see managed futures makes money when the S&P 500 either makes or loses a lot. But when the S&P 500 is just chugging along, making a few percentage points, managed futures doesn’t do particularly well because there’s not enough action in the markets.

Kumar: What prevents people from investing in managed futures is an inherent bias against systematic strategies. There is a great faith in human decision making, but much less faith in human decision making that has been quantified into a computer. People feel if a human being isn’t at the tiller, the thing is going to go askew. But the reason CTA strategies make money is because they go against the grain of human nature. It’s a strange situation that the reason it makes money is because it does things differently than people do, but that’s also what makes people uncomfortable investing in it.