How Investors Lose 89 Percent of Gains from Futures Funds
Investors in the $337 billion managed-futures market, expecting returns
that will defy stock market slumps, instead find most of their gains
gobbled up by commissions.
The pitch was enticing. At a time when the Standard & Poor’s 500 Index had suffered a decline of 41 percent in the previous three years, Morgan Stanley (MS) 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 percent of their assets in managed futures outperformed those whose investments were limited to a combination of stocks and bonds, Bloomberg Markets magazine will report in its November issue.
Clients jumped in. During the decade ended in 2012, more than 30,000 investors entrusted Morgan Stanley with $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. The fund already had $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 $490.3 million in trading gains and money-market interest income.
No Gain
Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns -- not one penny. Every bit of those profits -- and more -- was consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley.
After all of that was deducted, investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.’s 500 Index Fund, they would have reaped a net cumulative return of 96 percent in the same period....MORE, including attachments.
