Our weekly newsletter is out, and this week we’re going into a bit more detail on one of the most common investing mistakes: performance chasing. As is the case in every asset class under the sun, managed futures investors love to chase performance. The sustainability of a strategy often comes second to double or even triple digit returns. We do our best to discourage such decision making, because in our experience, this is uniquely damaging in managed futures allocations.
The fact is that drawdowns – or extended periods of severe losses – are a fact of life for managed futures investors. There is no way to avoid them; every program goes through them. But in our experience, performance tends to be cyclical for quality programs. They will have a run up, face a drawdown, experience a recovery period, and repeat the process all over again. An investor making allocations at the peak of a run up period usually sets themselves up for losses in the short-term – losses that typically don’t sit well with an investor who was chasing returns in the first place.
However, we’ve found that the best way to explain the significance of such cycles to investors is to show them how it’s happened in the past. In 2010, we did just that, looking into the performance cycles of Clarke Capital. However, with the overarching trend of the asset class’ performance cycling between up and down years being called into question by back to back losing years, and a great deal of the trend following space in drawdown, we thought it would be helpful to take a closer look. Here, we examine the reasons why investors chase performance, the cycle they step into when they do, and what that looks like in an individual track record.