Salient to Investors:

Managed futures turned out to be good for brokers and fund managers but not for investors.

During the decade ended in 2012, over 30,000 investors put $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP, which already had $341.6 million invested during the previous 8 years. In the decade ending in 2012, the fund made $490.3 million in trading gains and money-market interest income, but investors for the whole decade lost $8.3 million because all of the profits were consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley. Investors in Vanguard’s 500 Index Fund would have earned a net cumulative return of 96 percent in the same period.

In the $337 billion managed-futures market, return-robbing fees are common. 89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from 1/1/2003 12/31/2012. The funds held $13.65 billion of investor money at the end of 2012. 21 of those funds left investors with losses. Interest income from T-bills and other debt investments totaled $2.34 billion and without those gains, the combined 10-year earnings of $1.3 billion after fees in the 63 funds would have been converted to a loss of more than $900 million. As interest rates have fallen to historic lows since 2008, managed-futures funds have suffered their largest declines ever.

29 Morgan Stanley and Citigroup managed-futures funds had an aggregate deficit of $1 billion in the 4 years ended on 12/31/13, while fees totaled $1.5 billion.

Bart Chilton at the CFTC said the big news is that the fees are so outlandish, they can actually wipe out all of the profits.

Brokers have an incentive to keep clients in managed-futures funds because they receive commissions annually of up to 4 percent of assets invested. Investors pay as much as 9 percent in total fees each year, including charges by general partners and fund managers.

Thomas Schneeweis at the University of Massachusetts Amherst said people put money into managed futures because their brokers recommend them. Schneeweis said everything is marketing – these things are sold, not bought.

James Cox at Duke University said brokers that do not clearly tell investors about the drastic effect of fees should be considered fraudulent. Cox said the government is to blame for allowing these products to be offered with inadequate disclosure.

The 7,752 investors in Bank of America Merrill Lynch’s Systematic Momentum Futures Access LLC fund faced losses of $135.3 million, after fees, from 2009 to 2012.

The Grant Park Futures Fund LP marketed by UBS reported a net investor loss of $68.6 million during the decade ended on 12/31/12, after fees and commissions of $427.7 million.

Managed-futures funds often rely on charts produced by BarclayHedge – no connection to Barclays Plc – which reports a 29-fold gain through 2012 for managed futures overall since 1980. BarclayHedge does not deduct billions of dollars of fees charged by funds and uses only information volunteered by managed-futures traders. Traders can stop providing data if their system starts to lose money or collapses.

Managed-futures funds are a subset of hedge funds. Hedge funds typically charge a 2 percent management fee and 20 percent of investor profits each year, while a managed-futures fund often charges 7 to 9 percent of assets and 20 percent of any profits each year.

The National Futures Association does not require managers to disclose the effects of fees on investor profits over time.

Despite being commonly promote as protection against stock market declines, managed futures are non-correlated, meaning their performance does not track that of any other investments, either positively or negatively.

The SEC has no category listing managed-futures funds, as it does for mutual funds or corporate filings. Like hedge funds, managed-futures funds have not been required to file with the SEC as a matter of course, though an SEC rule has mandated that any partnership with more than 500 investors and $10 million in assets — even a hedge fund — must file quarterly and annual reports but do not have any obligation to disclose how fees in recent years ate up all trading gains.

The Futures Portfolio Fund, which started in 1990 and was marketed by 140 firms, including Wells Fargo and Ameriprise Financial, gathered $2 billion from more than 17,000 investors during the decade ended 12/31/2013. It had net returns after fees of just $84.3 million, for a 3.6 percent compounded annual growth rate.

Pension funds, college endowments and other institutions invest in managed futures, but individuals bear the brunt of the fees.

The Strategic Allocation Fund provided a 10.5 percent compounded annual rate of return to investors in its first decade of trading through 12/31/2003. From 2003 to 2012, more than 15,000 investors put a total of $4.5 billion into the fund, recruited by Merrill Lynch, UBS and other. The fund’s earnings of $2.43 billion shrank to $158.8 million after fees and expenses of $2.27 billion, resulting in a 0.6 percent compounded annual rate of return for the decade and versus an annual return of 7.1 percent, including dividends, for the S&P 500 during the same period.

Gerald Corcoran at R.J. O’Brien & Assoc. and a director of the Futures Industry Association said investors are going to lose money in managed futures over time and most retail investors should not be in managed futures. Corcoran said managed futures serve wealthy investors and are an important part of a diversification of a sophisticated portfolio.

Keith Stafford at Arthur Bell, CPAs specializes in auditing hedge-fund and managed-futures data and is constantly amazed by the poor performance of managed futures for individual investors and asks why anyone would invest in them – it’s a racket.

So incomplete are the disclosures for managed-futures funds that investors sometimes cannot even find out the names of the people managing them. BlackRock refused to name the CTAs it hired for the BlackRock Global Horizons I partnership, even after the SEC requested that information in 2009. The SEC insisted and BlackRock began making the disclosures. Its fund lost $10.2 million for investors in the decade ended 12/31/2013 after paying fees, commissions and expenses of $170.3 million.

From 2003 through 2012, the S&P 500 delivered more than twice the gains of the BarclayHedge CTA Index – 98.6 percent versus 47.9 percent.

In the secretive world of managed futures, managers often keep millions of dollars of investment gains even as their clients suffer losses.

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