Why Not to Invest in Futures Funds

If you or your family has investments in so-called futures funds, you might want to pull out your money out of them immediately. David Evans, writing in Bloomberg, has a big piece on how these futures funds have been a complete cash drain on those who unwisely chose to invest in them. While traditional hedge funds charge a 2 and 20 fee (2% fees, 20% of profits), these futures funds charge as as much as 9 percent in total fees each year (which is astronomical):

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.

The “powerful argument” for managed futures turned out to be good for brokers and fund managers but not so good for investors.

In the $337 billion managed-futures market, return-robbing fees like those are common. According to data filed with the U.S. Securities and Exchange Commission and compiled by Bloomberg, 89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from Jan. 1, 2003, to Dec. 31, 2012.

Fees: $1.5 Billion

The funds held $13.65 billion of investor money at the end of last year, according to SEC filings. Twenty-nine of those funds left investors with losses.

What’s more, it seems many of these futures funds escape transparency:

Like hedge funds, managed-futures funds haven’t been required to file with the SEC as a matter of course. However, an SEC rule has mandated that any partnership with more than 500 investors and $10 million in assets — even a hedge fund — must file quarterly and annual reports.

The SEC has no category listing managed-futures funds, as it does for mutual funds or corporate filings. Bloomberg Markets culled through thousands of filings in several categories, including one called “SIC 6221 Unknown,” to identify 63 managed-futures funds that reported to the SEC.

Even sophisticated investors should stay away from these managed funds.

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