What to expect from big managed futures managers and what you need to beat them

What should investors expect from the largest managed futures managers? We can gauge expectations through looking at the average return and volatility for the component managers of the BTOP 50 index. We looked at the most recent three year period and calculated the annualized return and volatility. The average return for this period was 4.79 percent with an annualized standard deviation of 11.5% for the managers. We then calculated the standard error for the mean and the standard deviation and placed all of the return and risk combinations in scatter plot. The oval represents one standard error in each dimension - return and risk. 

Clearly, there will be managers who will be outside the error range of approximately 2.5 percent for the mean return and 2 percent for volatility. These numbers will change with the sample size of managers. The BTOP index constitutes 50% of the AUM in managed futures and is currently represented by 20 managers who are equally weighted. These numbers will differ from the actual index because we use the current components of the index and annualize the yearly returns of the managers. We use the stated monthly standard deviations of the managers.  

Looking at a breakdown of returns by year shows that 2014 was a very good year while 2016 was difficult for large managers. It is clear that returns are highly correlated and driven by the same set of factors.

These returns provide a good benchmark for any manager who wants to compete against the largest reporting. In a perfect world, you will want to generate higher average returns with lower volatility. Over the last three years, you would want to have a volatility of less than ten and a returns over eight percent to be credible. Of course, the excess return and lower volatility has to be enough to compensate for the potential business risk of being a small manager not in the index. 

Looking at the scatter plot provides some interesting insights. No managers were able to  generate annualized returns of more than 6 percent annualized over the last three years with 10 percent volatility or less. In fact, there was only one manager that generated more than 10% returns regardless of volatility. Information ratios were all below one and only two managers generated ratios above .9. Of course, three years may not be enough data to truly measure the success of a manager but it does provide a good starting point for analysis.