Saturday, October 28, 2017

Col. Jessup, managed futures, and code red for liquidity


As we approach year-end, it is a good time to think about liquidity and exit strategies from current allocations. Many alternative investments are just not liquid when you need it, even if it is a daily fund. Of course, there is a price or cost with liquidity. Investors may exit but at onerous levels; however, those alternatives that focus trading on liquid instruments will have an advantage over complex strategies or funds that focus on asset that have lower liquidity to start with. Searching for liquidity in a market downturn is a losing game.

CTA manager (former Col Jessup) on managed futures and liquidity:

"Son, we live in an investment world that needs liquidity, and that liquidity has to be provided for by men with trading expertise and liquid strategies. Who's gonna do it? You? You, Lt. Weinberg?

As a liquid trading strategy manager, I have a greater responsibility than you could possibly fathom. You weep for higher returns and you curse managed futures. You currently have that luxury with your illiquid investments. You have the luxury of not knowing what I know; that current low CTA returns, while tragic, probably is driven by a risk seeking environment that will not last.

And my existence as a quant CTA, while grotesque and incomprehensible to you, provides liquidity for your portfolio. You don't want the truth because deep down in places you don't talk about at parties, you want me serving as a liquid investment. You need me to provide liquidity for your portfolio.

We use words like futures, trend-following, and crisis alpha. We use these words as the backbone of a life spent defending something, uncorrelated returns. You use them as a punchline as a reason to not invest. I have neither the time nor the inclination to explain myself to an investor who rises and sleeps under the blanket of the liquidity that I provide, and then questions the manner in which I provide it! I would rather you just did you due diligence said "thank you", placed us in your portfolio as a diversifier, and went on your way. Otherwise, I suggest you sit in front of a terminal and start trading."

Perhaps a bit extreme but the price to be paid for diversification and liquid strategies is a current topic on the minds of many investors. It is not the price when markets rise but the cost when markets are falling. In that case, an uncorrelated fund which trades liquid futures has significant benefit.


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