The American way has long been to go out, pull yourself up by your bootstraps, and make something of yourself. This rugged individualism has fueled innovation and growth for years upon years, but there’s one world where being the lone wolf can actually hurt you.
Managed futures.
A managed futures program, speaking abstractly, relies on a strategy developed and executed by the managers therein. In a situation where there’s only one person doing the trading, that means that the success of the entire program is resting on one man’s shoulders. If you’re looking at $400 million in assets under management, that’s a heavy load to tow on your own.
When it comes to portfolio construction, we’re wary of these one man shops, due to what is often (admittedly, callously) referred to as “bus theory.” If one man is managing your money, and that one man happens to get hit by a bus tomorrow, what comes next?
In reality, the risks extend beyond rogue public transportation vehicles. Prolonged illness, losing their “edge,” retirement, vacations and more also present potential complications for the concerned investor. Anything that would keep that one man away from work could pose a threat. When put in that light, it’s enough to make anyone nervous- especially because there’s no numeric representation of this risk in the metrics you sort through before investing.
That doesn’t mean that everything has to dissolve into chaos if a hypothetical bus were to stop short. Some managers leave standing instructions with a CTA Desk or Broker to exit trades if they don’t hear from them in a certain amount of time. Others, like Roe, Clarity, and Hoffman, have close independent broker relationships, and have backups to liquidate orders if necessary.
These days, most have taken on some sort of staff who can diligently exit trades if necessary. In fact, none of the managers on our recommended list, in our opinion, are currently susceptible to Bus Theory. In our experience, it’s newer CTAs that are more prone to being one man bands than established products, largely due to overhead issues. They will get started on their own and plan to hire “down the line.” Ultimately, those that want to manage large money are forced to bring on more people or align themselves with a larger group for support.
Even those who don’t want to join up with a larger firm realize that the “one man band” approach is probably not the best to take. Realistically, many of these managers just want to trade, so it makes sense for them to take on partners to help them handle the day to day business affairs of their CTA. We’ve seen this become a more and more common strategy for a variety of programs.
This may not solve every problem. There are still a lot of buses out there, and if it hits the trading partner, the CTA still has a considerable problem on their hands. There is a gray area for managers like Global Ag, Quantum Leap, Cervino, Bluenose, Bouchard and others, where one person is responsible for trading, while the other partner focuses on managing the business day-to-day. In these cases, we would have to assume the program would be shut down because the business partner does not have enough trading knowhow to continue managing the product.
But even that depends on the CTA in question. In some cases, the partner may have enough trading experience to continue on with the program. Such was the case with Rosetta earlier this year, when Mike Swinford tragically passed away after an accident. His partner, Jim Green, has successfully been able to take over the program, which is now up 1.35% YTD [Disclaimer: Past performance is not necessarily indicative of future results].
Even with these safeguards and reassurances, at Attain, one man bands have a hard time getting through our due diligence process. This, in and of itself, serves as a reminder as to why working with a broker is just smart when it comes to managed futures. You can analyze all the statistics you want, but without the due diligence taking place behind the scenes, you might miss this major risk factor before making a decision.
That being said, these one man shops seem to be going the way of the dinosaur, in our opinion. There may be one “brain” calling the shots for a program, but they won’t be the only ones with the keys to the kingdom if they plan on really making a go of it.