Pain of managed futures 'gains'

[LOS ANGELES] THE pitch was enticing. At a time when the Standard & Poor's 500 Index had suffered a decline of 41 per cent in the previous three years, Morgan Stanley was offering its clients the possibility of some relief. In a prospectus, the New York securities firm invited its customers to put their money into a little-known area of alternative investing called managed futures. "If you've never diversified your portfolio beyond stocks and bonds, you should know about the powerful argument for managed futures," the bank wrote. "Managed futures may potentially profit at times when traditional markets are experiencing losses." Morgan Stanley presented a chart telling investors that over 23 years, people who put 10 per cent of their assets in managed futures outperformed those whose investments were limited to a combination of stocks and bonds, reports Bloomberg Markets magazine in its November issue.

Clients jumped in. During the decade ended in 2012, more than 30,000 investors entrusted Morgan Stanley with US$797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical. The fund already had US$341.6 million invested during the previous eight years. Top fund managers speculated with that cash in a wide range of asset classes. In that period, the fund made US$490.3 million in trading gains and money-market interest income.

Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns - not one cent. Every bit of those profits - and more - was consumed by US$498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley.