How to Handle the Long Draw Down in Managed Futures

I have been trading managed futures since 1994. This has been one of the most challenging periods ever. Not just due to the draw down but the duration of the draw down. I am not alone. I have spoken to many of the industries veteran traders who have been around since the 1980s and the general consensus is the same. One original Turtle trader told me that this is the worst he has ever seen in his career. We spoke and then he mentioned that potentially over the last 100 years this might not be so unique. Many commodity trading advisors have quit. Clients abandoned the field. Seems so many have thrown in the towel. Personally I have had clients leave. It truly has been a challenging period. Even the leading Long/Short Hedge have experienced a difficult period recently. Maybe the place to be is in cash.

Through numerous conversations with long time successful managers some ideas of how to handle the long draw down in managed futures have been crystallized.

1. Lower exposure ( I only risk between .4% to .75% on a position)…I have seen recently many managers close because they traded much larger than this.
2. Trade in smaller risk per trades
3. There are many who suggest developing shorter term strategies. I am not in agreement with this. Potentially even extend trading periods. ( I have several trading models, one in which is a long term trend following system & it has held up and is positive).

As much as past performance is not indicative of future performance…and it has been extremely tough…taking a contrarian stance, this might be one of the best times ever to invest in managed futures. This is extremely tough to do. I bought draw downs of some CTAs and their draw downs got even worse ( even to the extent of worst draw down ever).
We are dealing with uncertainty. We must accept the risks…We must have patience and discipline. The reality is that very few actually make money investing in managed futures as they do the wrong things. They buy a CTA when he is doing well and sell at the first inevitable draw down. There will always be losses and draw downs. This draw down however has been very tough…

Past performance is not indicative of future performance

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2 comments to How to Handle the Long Draw Down in Managed Futures

  • You mention a number of issues here. I will address them in the order as you have written them in your piece.

    First, there is the issue of of the general situation, you ,mention that many of your collegues are in similar situations to yourself. This is partially true. I know of many managers who have not done too well. However, this really is beside the point, since the benchmark of your performance cannot ever be other traders but just you.

    We tend to seek solace in the fact that there are many other traders with the same problems as we have, and guess what, you look for them and you will find them. It is a universal law, that like energy attracts like.

    You mention exposure. To my mind there is nothing wrong with your position sizing, however your risk management of the positions might need looking at. You do not go into that part of your strategy.

    As for developing shorter term strategies, I am with you on this one: It is a delusion to believe that a shorter term strategy will get you out of the loop. Odds are that you might get even deeper into the morass. The issue is first and foremost a psychological one. You are experienced and you know what you are doing. It rather strikes me that you are experiencing difficulty with the massive change in crowd psychology and hence market psychology and are also buying into the general uncertainty of the collective consciousness rather than staying in your own center and that means staying in your own power.

    We are so used to operating from an external vantage point, believing that exertnal reality reglects our inner reality, our abilities and our options going forward, when exactly the opposite is true. Your outer world is but a reflection of the past and has no bearing on the future. Your future is dictated by every decision you make in this moment. The decisions you make are coloured by how you see yourself and how you see your world around you.

    My question to you is what beliefs do you hold that keep you in the loop that allows you to experience extende3d draw downs.

    You say we deal with uncertainty. True. You say we must accept risk and be patient and disciplined. True, with one caveat: Where are you focusing your discipline? All the discipline applying the laws of trading in a linear fashion is old hat and a waste of time. I said before, you know what you are doing, you know the rules and won’t do anything stupid. The discipline has to be applied to how you feel about yourself and becoming aware and mindful about how you are projecting your thoughts, emotions and feelings on your trading.

    Indeed past performance is not indicative of future performance. In fact the past has nothing to do with the future. The more we learn to be conscious and aware we more choice we have. Choice in every moment of now dictates the so called future and is totally independent of the past.

    • andrabr9

      Thank you Mercedes,
      You have made great points. I especially like your mention of a personal benchmark. I strive for that. In regard to money management I use overlapping concepts based on risk per trade..risk per sector…portfolio risk. More so I look at the $ risk per trade. For example I attempt to buy quiet markets that are breaking out. Depending on the model, I will not supersede $2500 max per contract. More so I take correlations into account.

      Again these are not perfects as they do not exist. I write as well as mentor in order to build my discipline and patience. This is a very hard game. It is easy to become dejected during long durations of draw downs. However this is what separates successful traders and not. If it was easy, everyone would be doing it and it would not work. I speak to many sophisticated investors all seem to have their demons. The emotions are Achilles heal of successful trading.

      I appreciate your comments and wish you the best

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