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Index Track: You may be surprised at the variation in returns...

Tuesday, February 10, 2009

Index Tracker

You May be Surprised at the Variation in Returns

Managed futures did phenomenally well in 2008, but exactly how well depends on which index you consult. Here is a selection of managed futures/commodity trading advisor indexes. The returns for the year range from around 10% to more than 20%--a significant range, with the high end of the spectrum about double the low end.

Indexes vary because databases from different vendors do not contain the same set of programs or managers. Databases vary in size as well, from a few hundred of CTA programs to thousands.

Another reason for the differences is methodology—some use assets under management to weigh funds in calculating the index, whereas others give all funds, large and small, equal weight. There are pros and cons for both methods and the choice depends on a user's needs. Using assets as weight means that the returns of larger programs dominate the index, which may work for users interested primarily in large programs but not for those assessing small ones.

The EDHEC index is not derived from a separate database but rather is a combination of several indexes. EDHEC, a French business school, calculates combination benchmarks using an analytical method to capture as much information as possible from available indexes, so the measure may represent a wider section of the industry.

Questions about index construction occur for all hedge fund strategies and even for widely used mainstream benchmarks—after all, even the Standard & Poor's 500 comes in market capitalization-weighed versus equal-weighted versions. Different indexes have advantages under different conditions.

Regardless of the index used, the fact remains that managed futures did spectacularly well compared to other investments. The only mainstream asset class that made gains high enough to be within the range of managed futures returns was—you guessed it, US Treasury bonds, with Barclays Capital US Treasury index making 13.7%.

2008 Performance
Barclay Hedge 14.6%
Credit Suisse/Tremont Managed Futures 18.3%
HedgeFund.Net CTA/MF Benchmark 12.2%
FTSE CTA MF Index 10.5%
Greenwich Futures 20.2%
Hennessy MF Index 16.2%
EDHEC CTA Global 15.6%
Other Asset Classes:
S&P 500 (-) 37%
MSCI EAFE (-) 43%
Barclays Capital US Aggregate Bond Index 5.2%
Barclays Capital US Treasury Index 13.7%

This article was published in Opalesque Futures Intelligence.
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