The performance metric picked to advance from 32 CTAs to our “sweet sixteen” is Best Lowest 3-Year Return.

“Best Lowest?” What on Earth does that mean? As confusing as it may be to read, it’s actually quite straightforward: we comb through each manager’s track record to find their worst 3-year stretch, and the program with the best (or if you like, “least bad”) figure advances to the next round.

We incorporated programs’ “best worst” returns into our ranking algorithm because we have been there living through tough drawdown phases, and all things being equal – we would prefer a program whose worst is better than the next guy’s worst period.  We’re not just interested in how well a CTA has done when it is doing well, but are also interested in the perhaps even more telling statistic of how well each CTA has performed during bad market environments for the program.  Everyone looks great during the good times, but it is a rare few who control losses and look great during the bad times.

Now, this metric can reward newer programs somewhat, as a program with twenty separate 3-year periods is more likely to have had a bad one that someone with just two 3-year periods. But, considering how tough 3 out of the last 4 years have been for the universe of managed futures, it’s not necessarily a guaranteed win for the younger programs. Instead, this round is about risk control: penalizing the programs that have had larger than normal bad periods (even if they recovered from them), while rewarding those programs which have managed to limit losses (or even have gains) during their worst stretches.

The range of returns here wasn’t quite as wide as it was when we looked at total return in the previous round. The best lowest 3-year return was 102% (Global Ag), while the worst was -26% (Clarke Capital Management) [Disclaimer: Past performance is not necessarily indicative of future results]. Of the 32 programs in this round, 14 of them had “lowest 3-year” returns higher than zero. That’s right, almost half of them have never experienced a 3-year stretch in which they lost money (no wonder they are among the largest and highest ranked managed futures programs out there).

But many of the high seeds in our contest were unable to avoid upsets in this round: two of the #1 seeds were knocked out, along with all four of our tournament’s #2 seeds. The overall #1 seed Winton fell to #9 seed Four Seasons in a narrow upset, sporting 13.1% for their lowest 3-year return, versus an 11.8% figure for Winton. Meanwhile, #8 seed Global Sigma’s lowest 3-year return of 67.0% led to a comfortable victory over Transtrend’s -6.8%.

Of course, Transtrend fans would likely call foul due to the winner in its “game” only having 5 rolling 3 year periods versus 180 such periods in Transtrend’s track record.  But unlike basketball and a fixed set of rules there (although even there the interpretation of the rules by the referees can cause angst), the rules of investors in picking managers to invest in aren’t nearly as fixed. One investor may (we would say correctly) discount a program’s near perfect rolling three year returns with the fact that it has only been around for a little over three years, another may discount an established programs 15 years of history and say “what have you done for me lately” when looking at just the past three years.

The moral of the story – use more than just the best worst three year return.

For those that entered our contest, click here to see the results and current standings.