They say any publicity is good publicity…
If that’s the case, Standard and Poor’s might have achieved the “marketing coup” of the year/decade/century (time will tell) with their downgrade of US credit rating last Friday (possibly thanks to a $2 Trillion Mistake).
SGMI: a new Trend Following Index
But this is not the piece of news that caught my attention today.
Standard and Poor’s announced the creation of the S&P Systematic Global Macro Index (SGMI).
With this index, S&P basically intends to track – or rather replicate – the performance from the Managed Futures / CTA space:
London, August 9, 2011 – S&P Indices has launched the S&P Systematic Global Macro Index (SGMI), which aims to reflect price trends of highly liquid global futures, representing the general level of volatility taken by managers in the global macro and managed futures/Commodity Trading Advisor (CTA) space.
This is a rules-based index, which will implement a trend following system to trade a (semi-diversified) portfolio of liquid futures markets, with a fairly standard risk-adjusted equal allocation per sector and per instrument:
The Index is diversified globally across 37 constituents, falling into the six most widely traded sectors– Commodities, Energy, Fixed Income, Foreign Exchange, Short Term Interest Rates and Equity Indices.
The weighting scheme applies an even risk capital allocation across the index by sector and again to each constituent within each sector so that no single sector or constituent drives the volatility of the index.
Other Trend Following Indices
Of course, this is not a new concept. There are several companies tracking the performance of Managed Futures (Newedge, BarclayHedge) with their respective indices – or even “closer to home” the Trend Following Wizards report on this blog.
Even the concept of using a rules-based systematic trend following approach has been implemented before. Apart from the State of Trend Following monthly report, also on this blog, long-time readers will recall this Beta of Managed Futures paper by Conquest Capital Group, which developed a mechanical trend following benchmark aimed at replicating CTAs performance. I discussed the paper more than a year ago in this “Betafication of Alpha: towards a Commoditization of Trend Following?” post, and was asking then “when the launch of a Trend Following ETF?“.
The end game of Conquest is of course to market their fund implementing this benchmark and it is pretty certain that the end game with this S&P index is similar. One can only speculate (again) as to how long it will take to see a SGMI Trend Following ETF.
The underlying strategy in this new S&P index seems to contain an adaptive timeframe logic (whereas the Conquest Capital Group benchmark uses a combination of several fixed timeframes to capture trends at different levels):
Uniquely, the trend-following model used [by the SGMI] to determine the position of each constituent is flexible enough to allow a customized time-period for each constituent on a monthly basis, unlike models which are based on fixed time-periods. This means that if a longer term trend is driving the market, the Index reflects that, but if a shorter-term trend becomes significant the Index picks that up, using an iterative process to test the stability of each trend.
Trend Following ETFs: a Viable Possibility?
Of course, despite the potential appeal of strong replication and much lower fees for a “speculative” SGMI ETF, this is not necessarily a winning proposition for the investor. The debate resides in whether CTA managers can justify their fees.
Using a Geometric Information Ratio calculation based on the Conquest benchmark, I showed previously that CTAs still produce alpha over the benchmark on a net-of-fees basis – most likely thanks to their research in other areas such as enhanced rolling methodology, execution efficiency, extra diversification (100+ markets instead of 37), etc.
Note that this calculation was not free of survivorship bias though.
This could be one of the reasons why the Conquest fund has not taken off in any substantial manner (less than $200M in AUM after 7 years trading).
Another similar Trend Following fund is the Cambria Global Tactical ETF (GTAA), run by Mebane Faber. Unlike CTAs it does not trade futures (it is an actively managed “ETF of ETFs”), however its core strategy uses long-term trend following principles to allocate funds between 50 to 100 underlying ETFs representing different global asset classes.
It only launched late last year and is already at the same levels of AUM as the Conquest fund, showing that there is an appetite for this type of product in an accessible format (i.e. no high minimum account size).
A fact also highlighted in the S&P press release:
“Issues like high minimums and high fees have made it difficult for many investors to gain access to global macro and managed futures strategies. We envisage that new products based on this index will give investors the ability to invest in a long/short, comprehensive set of the main futures contracts.”
“Gimmicky” Index and ETF?
Josh Brown and Abnormal Returns argue that, in a case of the tail
wagging the dog giving birth to puppies, there is a plethora of index creation, in the sole aim to support “niche and gimmicky ETFs” – quickly turning into “zombie ETFs” destined to populate the ETF Deathwatch list.
It will be interesting to see if the “SGMI ETF” is one these “puppies” or whether it can create a substantial impact in the Managed Futures and Trend Following industry – as its great-grandfather the SPY did within the wider investment industry (trading volume: $80B yesterday).
What To Think of it?
It obviously depends on the actual performance of this index and its derived products, so only time will tell.
CTAs: Do you see this development as a threat to your business, or as a way to bring more awareness to the sector? Are you feeling confident about the added value that you can provide to fend-off this potential new competition?
Investors: Are you excited at the prospects of being able to invest in managed Trend Following without the big “minimum account size” hurdle? Are you skeptical of the capacity of the index to replicate the performance of Trend Followers?
Independent system developers: Does this reinforce your belief into building your own system? Would you reconsider building a system if you could invest in an ETF-like Trend Following product?
I’m keen to hear your opinions… Feel free to contribute to the discussion in the comments section below.
UPDATE: Tim Pickering from Auspice Capital has commented below but also expressed his (interesting) point of view from a CTA perspective on their blog. In essence they do not feel threatened as they “believe in the separation of the alpha and index methods” (read the post here to see why). He also pointed out that:
S&P is surely not the first to do this. In fact, their previous effort has been widely regarded as unsuccessful from a performance standpoint. The S&P DTI (and related) indices have been around for some time now.
UPDATE 2: Several Trend Following investment products (ETF, ETN, etc.) already exist actually.
Prompted by reader Pumpernickel’s comment (below), I decided to research more about the DTI index that was mentioned by Tim Pickering in his blog post. I was under the impression that a trend following ETF was a really new concept, but it appears that some products very similar already exist. Below is a summary from this “google” research:
The “Diversified Trends Indicator” (DTI) has been created by Victor Sperandeo, with a few investment products having been launched based on this index (or one of its sub-indices: the “Commodity Trends Indicator” [CTI] and the “Financial Trends Indicators” [FTI]). The DTI is a based on a single mechanical trend following/momentum strategy applied to a portfolio of 24 US futures.
From Alpha Financial Technologies (Victor Sperandeo’s firm) website:
In 2002, AFT granted Standard & Poor’s the exclusive right to sublicense the indexes to third parties, known as the S&P Diversified Trends Indicator, S&P Commodity Trends Indicator, and S&P Financial Trends Indicator. S&P launched the S&P Diversified Trends Indicator in January of 2004. Over the next two years several offshore products linked to the S&P DTI were launched, including a UCITS III Fund by Nomura International PLC. In 2007, Rydex launched the first long/short managed futures mutual fund, which tracks the S&P DTI. Direxion funds launched a mutual fund that tracks the CTI® and a mutual fund that tracks the FTI™ in 2008 and 2009, respectively. In July of 2008, Merrill Lynch structured an exchange-traded note that tracks the S&P CTI.
In November 2009, AFT commenced licensing its indexes directly to third parties, although existing S&P licenses remain in effect. On August 1, 2010 AFT launched the FX Trends Index™ (FXTI®). In January 2011, Wisdom Tree launched an exchange traded fund (ETF) which tracks the DTI®.
Investment banks and financial institutions in over 15 countries worldwide have licensed AFT’s indexes. As of April 2011, there are over $3 billion invested globally in products utilizing AFT’s indexes.
Tickers for the indices and some of their investable products:
Bloomberg Index Tickers:
- AFT Indices: DTI® TR: DTITR
, CTI® TR CTITR , FTI™ TR FTITR .
- S&P Diversified Trends Indicator: Price Return: SPDTP, Total Return” SPDTT.
- Rydex SGI Managed Futures: RYMFX (mutual fund based on S&P DTI and trading since 2007)
- ELEMENTS S&P CTI: LSC (ETN based on the S&P CTI and trading since 2009)
- Direxion Commodity Trends: DXCTX (mutual fund based on the AFT CTI and trading since 209)
- Direxion Financial Trends: DXFTX (mutual fund based on the AFT FTI and trading since 209)
- WisdomTree Managed Futures: WDTI (ETF based on the AFT DTI and trading since 2011)
I have also found this “interesting discussion” between Attain Capital and Victor Sperandeo on whether DTI-based products really can deliver Managed Futures performance.
In the first “missive” (in this article), Attain Capital argue that the DTI-based products are wrongly labeled as “Managed Futures” as they offer no exposure to the sector directly. They go on to show that the DTI index has seriously under-performed the Newedge CTA Index (and that in turn the Rydex mutual fund slightly underperformed its DTI benchmark due to expenses) since 2007 (total return of 28.85% for the Newedege index vs. 3.36% for the Rydex fund). They also chart the 12-month rolling correlation between the DTI and various CTA indexes. The figure oscillates around 0.3 and 0.9 for an average of 0.6 between 2000 and 2007.
Victor Sperandeo responds that he “developed the Diversified Trends Indicator™ as a way for investors to access the “core” returns embedded within trend-following in the futures markets” and that the DTI does indeed implement a (single) Managed Futures strategy by the way of a mechanical trend following system on a diversified portfolio of futures. He further highlights that the DTI actually out-performed the Newedge CTA Index since 2004 while providing a more practical way of investing in Managed Futures, compared to the un-investable CTA index from Newedge.
In a further reply, Attain Capital highlights that comparison between DTI and Newedge CTA Index should be done on a realistic basis (DTI Total return minus an annual 2% fee with the Newedge index already being net of fees), in which case the DTI slightly under-performs the Newedge CTA index, concluding:
We don’t believe they will see long term success beating the managed futures indices (or if they are even trying to beat those benchmarks) because they track only a single strategy.
It seems that both have a point – and certainly a different viewpoint (and interests). It actually ties back to the alpha vs. replicated beta “debate” and what place the mechanical and investable index-based products take in the managed futures space.
As Tim Pickering was saying “I believe in the separation of the alpha and index methods. We feel it will bring awareness to CTA and offer product to investors that do not know about/understand or have access to “Accredited or QEP” products. For CTAs that generate Alpha at reasonable price, this exposure can only help you.”
It will be interesting to see – but hard to measure – whether a Starbuck effect additionally develops from these products to boost sales from classic CTAs.
These indices and products are something I had completely missed, so thanks again to the readers who offered pointers to more info.
UPDATE 3: Trader Vic Index (TVI):
Thanks to reader RB, who pointed out the Arrow Managed Futures Trend Fund, which tracks another similar index created by Victor Sperandeo: the Trader Vic Index (TVI).
The index was developed as a partnership between RBS and Enhanced Alpha Management, L.P. (EAM, LP) – Sperandeo’s CTA firm – and launched in 2009. The Arrow Funds mutual fund offering based on that index started trading in 2010, and has around $100M in AUM.