I did not really understand why everyone said inflation was imminent either, until I read this article. Below is a quote, followed by a link to the entire article, which I also posted on another thread: "First, it is important to have a proper understanding of inflation. Most people believe that the definition of inflation is rising prices. This is not true. The definition of inflation is when the supply of new money outpaces the production of goods and services. When an increasing supply of money chases a decreasing or static supply of goods and services, the money becomes worth less (or worthless, if you prefer) and the price of goods and services goes up." http://www.investorsdailyedge.com/inflation-is-not-coming-it-has-arrived.html
But you are assuming the money supply will increase, which would require banks to create more credit. IMO that is pretty unlikely during a big recession & credit crunch. The Fed increasing bank reserves through QE will most likely not result in credit creation (as it would in normal times), but will rather just stave off or slow down credit contraction. Once there are signs that banks are actively expanding credit again, QE will be reversed and the Fed will hike interest rates. Without that monetary expansion, the whole inflation argument is null and void.
1. The good old "What if markets won't trend" and "But the fees are high" arguments. Yawn. Besides, historic returns of all funds I know are listed net of fees. 2. Equity dividends and real estate rental income are not tax free. Plus physical real estate has many hidden costs (agents, legal fees, stamp duty, maintenance) that some underestimate. 3. If managed future funds are not an insurance against - as I suggested - uncertainty about future de-/inflation, then neither are the real estate/bonds/commodities alternatives you listed. 4. That's why I said "who doesn't want to trade himself". 5. You need a $2-$3m account in order to properly trade a diversified managed futures strategy (comparable in diversification to professional funds). Double/triple that if you want to trade different time frames for additional diversification. That's another reason some retail investors are forced to stick with funds rather than trading themselves. 6. Your "lazy portfolio" would likely get destroyed in a global 20 year Japan style deflation, with 4 out of 5 being risky assets. Adding managed futures could (at least the relatively short history of managed futures suggests that) reduce volatility of such a portfolio.
Do you really believe the Fed will have the cajones to reverse QE and hike interest rates?? I doubt it.....I remember Volcker doing it but he had Ronald Reagan at his back and was able to withstand the beatings he took when he testified before Congress. Of course, in a different America, this is the big question...... Stosh
1. What's the quality and integrity of this returns data though? The historic returns for managed futures came during an era of low and falling inflation, only go back a few decades, and are seriously overstated due to survivorship bias issues. So the data is simply not robust for estimating future potential returns, and that is especially so if we go into a high inflation era totally different to the last 3 decades (not to mention higher tax and higher regulation of shorter-term trading activities). By contrast, the traditional asset classes have over a century of data through almost all imaginable economic environments. For managed futures, high fees are assured; but where is your assurance of high future returns? On what grounds do you expect that - just that it happened in the last 20 years? Stocks did well for the 20 years leading up to 2000... 2. But tax and fees are levied on nominal annual realized gains. Therefore the higher the inflation rate, tax rate, and asset turnover rate, the more deadweight costs you will incur. Physical real estate for most investors will just be their own home (and paying off the mortgage) - portfolio real estate investments would be REITs generally. Since equities and real estate/REITs defer capital gains significantly, and in the latter case avoid certain taxation, and have a significant portion of their returns in the form of these deferred capital gains (especially so in an inflationary period), they become relatively more attractive compared to short/medium-term trading income, the higher the rate of inflation gets. Inflation basically increases the % share of CTA returns that go to people other than the investor, relative to stocks/real estate/bonds. 3. Your claim is a non-sequitur. The basic economics of the traditional asset classes (getting paid for providing capital to those who create value with it) are what support their robust long-run real returns. By contrast, the returns for managed futures are derived mostly from outsmarting the competition in a negative sum game. The latter are not robust, and economic principles make their returns far less likely to persist in future, due to basic principles of competition in areas of excess returns. As I stated above, there are significant tax and fee advantages to many traditional assets too. 4. Fair enough, but the work required to select, run due diligence on, and then manage a portfolio of hedge funds and CTAs is far greater than the work required to operate the turtle system or a MA trend-following portfolio (or to use a hedge fund replicator). The potential loss (100% - or higher if you get a Madoff clawback situation) is also much greater, and out of your control. 5. You need $2-3 million to invest a sensible proportion of your net worth in diversified fashion across 5-6 CTAs or hedge funds too. Probably more. 6. Sorry but if you run the numbers, as I have, then you would know your claim is false. The portfolio I posted was in response to wanting to hedge against inflation, but even that one definitely won't get "destroyed" by a Japan-style deflation, or even a 1930s depression. Even if your pension fund was 100% long stocks in 1928, your 30 year return was a little over 8% per annum. And of course you can tailor the allocations depending on whether you prefer to be more protected against inflation (the allocation I posted up), deflation (add a lot more fixed income), or both (somewhere between the two). A bit of back-testing allows you to construct passive diversified portfolios based on 100 years of robust, clean returns data free of survivorship bias, with those returns supported by basic economic principles, whose worst drawdowns under a variety of economic shocks were limited to around 30%, and always recovered. In addition, such a portfolio has significant tax & fee savings during inflationary times. These claims cannot be made for managed futures. IMO their main advantage is low correlation, but then we are talking about putting 10-20% of assets into them as a portfolio diversifier, not an inflation hedge or a robust return generator. Considering you need at least 5 funds to diversify manager risk, that means probably $1 mill+ just to put into CTAs - so you'd need a 5-10 mill portfolio to avoid overweighting. And you need due diligence to avoid Madoff risk - that puts it beyond the reach of most individuals who are not deci-millionaires. You need ongoing monitoring to check the managers are not slacking off, losing their edge, or defrauding you - that's a part-time job in itself, beyond the skill set of most investors. David Swenson in his books makes a good case that hedge fund and CTA selection is a labour-intensive ongoing process that is only really suited to exceptionally market savvy and experienced individuals, specialists or institutions. I'd recommend reading what he has to say. IMO a portfolio of hedge funds/CTAs is just not appropriate for 99%+ of mostly passive investors. Even for people worth $5 mill+ I don't think they are usually a good idea unless you outsource the due dilgence. Some people tried that and still ended up getting burned by Madoff, a well-flagged fraud. And of course you have a whole other layer of fees if you use a fund of funds.
Ad 1: Managed futures only have a history starting in the mid 70s simply because an array of commodity futures started trading then. Your claim that managed futures funds will likely not perform under an inflationary scenario is pure speculation; at a minimum, a managed futures fund benefits from high short term interest rates paid on cash collateral in a high inflation environment. Ad 3: "By contrast, the returns for managed futures are derived mostly from outsmarting the competition in a negative sum game." That's your opinion, not a fact. What percentage of total global outstanding dollar volume in total cash underlying and futures (stocks, interest rates, currencies, commodities) do managed futures represent? Yes, it's insignificant. Ad 4: Yes, maybe. Ad 5: Minimum investments in CTAs are usually between 100k - 250k. Of course, if you wish a big firm to run a managed account for you (i.e. thereby eliminating the Madoff risk), they will only consider you with 1m-10m of capital per account. But that's for institutional investors only and certainly not necessary for your Joe Average HNWI. I am pretty sure a retail investor with a liquid networth of 2.5m could deploy 750k of his capital across 3-5 managed futures funds after doing some homework without too many problems. Running a diversified portfolio of 40 different contracts across 2-3 timeframes is (IMO) impossible with that kind of capital. You would have to sacrifice diversification benefits while saving on those pesky fees and minimize risk of being Madoff'ed. Ad 6: "A bit of back-testing allows you to construct passive diversified portfolios based on 100 years of robust, clean returns data free of survivorship bias". Oh, c'mon, there is no "clean" 100 year history of tradable proxies for half of these asset classes. Obviously you are using numbers and ideas of Mebane Faber (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=962461). The returns of his "20/20/20/20/20 asset allocation buy and hold portfolio" you allude to are a half truth/half fiction pre 1975. There was no wide array of liquid commodity futures. There were no investable REITs pre 1960. You're simply extrapolating illiquid cash prices. BTW: There are simple ETFs and mutual funds that aim to capture managed future beta. LSC (ETF) and RYMFX (Mutual Fund). These are not trying to replicate performance synthetically, but are trading directional future positions from what I understand. Certainly something to look into for asset allocation long term investors that want to put 10-20% into an alternative beta class.
One of the things that I dont see being mentioned about 'guaranteed' returns in assets classes are country specific risks. Obviusly if one takes a hugely successful country like the US the returns are high across the board, in the meantime the backward looking icelandic investors are all licking their wounds, we also are yet to hear about the japanese buffett, I wonder why. Contrary to what buffett thinks, the longer you go the higher the volatility is, so buy and hold carries bigger risks than trading capital gains producing activities He is yet to debunk the notion that 200 years worth of US stock returns doesnt price in the fact that the US could get involved in a nuclear war with alqaeda in home soil, could suffer from hyperinflation, have its currency plunge 50% in a short period, etc. All of those types of risks need to be priced in in a long-term volatility and return expectation, yet he acts as if past returns are a guarantee of the future
The Fed has already printed over a trillion dollars of new money and is using it for bailouts and to pay for it's own treasuries (monetizing the debt). It is not an assumption that the money supply is increasing at an astronomical rate, it is a fact. Plus, commodity prices are rising rapidly (metals, crude oil, grains, etc) as the dollar is falling. Inflation is here. If you wait for the government to tell you so, you may wait as long as it took for them to tell you we were in a recession.