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Andrew Lo: Please Keep Your Day Job at MIT

edited February 2012 in Fund Discussions
Andrew Lo is a respected Professor of Finance at MIT and the Founder and Chief Scientific Officer at the AlphaSimplex Group. I just watched his interview on this week's WealthTrack (2/24/2012). Unfortunately, his academic expertise has not translated in to real world financial expertise at his Natixis ASG Funds: DSFYX (8/3/2009 inception, $419M AUM, 1.45% ER), GAFYX (9/30/2008 inception, $1.5B AUM, 1.35% ER), AGMYX (10/21/2011 inception, $26M AUM, 1.45% ER), and ASFYX (7/30/2010 inception, $805M AUM, 1.45% ER). All of these funds have had truly underwhelming performances since inception. These funds may outperform going forward, but I will want to see more impressive track records before I will buy.



  • edited February 2012
    I think it's been a tough few years for all long/short funds - has there really been one standout in the category aside from Marketfield (and that because it's much more flexible with the "short" element, among other things)?

    I'm very respectful of Meb Faber, his work and research, but GTAA simply isn't working in this environment (not that that's long/short, but a timing strategy that isn't working - see also the Toews funds, which appear to use some sort of in or out timing strategy, although the details of which aren't discussed.)

    That said, I think there is also a fundamental misunderstanding of expectations on some of these funds, and I think it's absolutely ridiculous that Morningstar compares them to the S & P 500. It reminds me of an argument that I had way back on fundalarm about how Arbitrage was a terrible fund because it wasn't beating the S & P 500 or something like that. They are low-key, absolute return diversifiers that are never going to hit the ball out of the park, but should be expected to hit singles in good times and bad and not be heavily correlated to the movements of the market.

    These sorts of long-short strategies have limitations (particularly in mutual fund format, more on that later), and expecting a managed futures mutual fund (or especially an Arbitrage fund) to beat the S & P on an up year is sort of like expecting a Super 8 to offer a similar experience to the Four Seasons. It just may lead to disappointment.

    As for Lo's funds, I think the only one that is really rather disappointing is the new Growth Markets fund, which has not gotten off to a particularly promising start in a year that has been positive for EM's.

    ASFYX has been towards the top of the category, but given the category numbers, it's clear that it has not been a good couple of years for Managed Futures funds in general - particularly the less complex/early managed futures funds that have a harder time following trends (Rydex Managed Futures, which at this point should be retooled/reworked, given that it remains a first-generation product in a second/third generation world.)

    Flexibility has always remained a consistent criticism of the Managed Futures category in terms of mutual funds. They can't be as flexible and rapid as managed futures hedge funds, and you have managed futures hedge funds doing well. As for a particularly well-known MF hedge fund: "The Winton Futures Fund, the firm’s largest at $7.3 billion, climbed 3.8 percent this year through April 22, according to a person briefed on the returns, who asked not to be named because the information isn’t public. The fund gained 15 percent in 2010." 15% is not remotely close to what any of the MF mutual funds did in 2010, unless there's a real gem I'm missing.

    Another large MF hedge fund example is Bluetrend, which returned 42.8% in 2008. The Rydex MF fund was cheered for returning something like 6%, I think. That's not a comparison between the two (because there is no comparison), but it sort of goes to highlight that, for all the discussion of "hedge fund-like" mutual fund products, they would be more accurately called "hedge-fund-lite" (and possibly "littteeeee" in some cases) products - managed futures in particular, as managed futures mutual funds seem the furthest away in terms of particular strategies from the capabilities of managed futures hedge funds.

    The hedge funds are likely are much more able to capture short-term consistent trends, rather than requiring longer consistent moves. If commodities markets and other markets aren't providing consistent trends, managed futures doesn't do particularly well/the strategy has off years (although again, I think with greater flexibility comes greater potential to handle that, but the mutual funds also aren't charging 2-and-20, either.)
  • edited February 2012
    Interestingly, I just finished reading about Prof. Andrew Lo in the current edition of Money magazine (came in the mail last night; page 87-91: Game Changers).

    Though I will never invest in his funds, but I like his interview, here are 3 quick takeaways:

    (a) Combination of smart people and technology have lead to complex tools such as hedge funds, derivatives, rapid trading, etc all of these will continue to have unintended consequences on the market until they are fully understood

    (b) "Buying a mutual fund and holding it for 10 years isn't going to give you the returns we once saw."

    (c) "You should be diversified not just with stocks and bonds but across the entire spectrum of investment opportunities: stocks, bonds, currencies, commodities, and domestically and internationally."

    In addition to his teaching and research workload, he consults for the government, so I doubt if he has much time for day-to-day affairs of the funds. Probably, leveraged his name to get those funds started, and hire/partner folks to do the grunt work.
  • Scott is essentially correct. I have funds invested with a few trend following CTAs. They had fantastic performances in 2008, one up 96% (and this after 2 and 20)! However, 2009 was poor and 2011 was also poor, so Lo's funds have gotten started in a generally unfavorable time for managed futures. Winton did have a good year in 2011, but they were a true exception so it's not fair to compare Lo to Winton. It remains to be seen if Lo can compete with typical trend following CTAs in a year like 2008 (which doesn't come around very often).
  • edited February 2012
    Reply to @Javelina: Thank you for the reply:-)

    Definitely not comparing Winton, but more pondering whether managed futures mutual funds have the even the capability to really pull off the strategy to "the full extent". I just don't think they could ever possibly remotely compete with (especially some of the stronger) managed futures hedge funds - and that's really why I mention that these are not "hedge-fund like" products as much as "hedge fund lite" products, although managed futures mutual funds seem the most "lite" versus comparable hedge funds in terms of alternative strategies. Some managed futures hedge funds manage very impressive numbers, but the most I would realistically expect from a managed futures mutual fund is probably high single digits or low double digits if everything clicks in a particular year.

    There are now some mutual funds that invest with various CTAs (such as Grant Park Managed Futures and Mutual Hedge Frontier Legends), but fees are rather high and one has to definitely expect off years with the strategy.

    Very neat that you are invested with a few different trend-following CTAs.
  • Scott, why do you think it's impossible for them to compete? The liquidity needed to handle possible daily redemptions might hinder performance somewhat, but it's not clear to me why they can't compete especially without the 20% performance fee.
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