I was recently scanning some performance databases of the various trading system, and Commodity Trading Advisors (CTA) reports and noticed that almost all the tracking services have some form of a “hot list.” These were usually a list of the best performing trading systems or CTAs over a given period. The typical time frames for measuring performance were usually 30 days, 90 days and a year. These lists are of interest to many viewers because they are consistently reported by all the leading tracking services year after year, but are those lists of any value?
It has long been my contention that such information is near meaningless. I have always felt that the best performing trading systems and CTAs of the past were not likely to be the best-performing ones moving forward. To test my theory, I accumulated data from several of the top performance reporting sites. What I wanted to see were the previous year’s best performers to compare them to the best performers of the next year. The idea was to see if last year’s winners were a reliable predictor of next year’s winners.
The results of comparing many years of previous performance to the subsequent years of performance were as I expected. The information about which trading systems and CTAs had done the best was practically useless. It, in no way, was predictive about which methods were GOING to do the best. What this means is that all those “Hot Lists” are potentially misleading. They can lure people into the idea that these are the best possible trading systems or CTAs they can be investing in when nothing could be further from the truth.
Finding a Good Trading System or CTA
So, finding a suitable trading system or CTA that is going to pay off is going to take work. It is not going to be as easy as finding something that has done well and just assuming it will continue to do well. What we have seen is that often the best time to enter a program is AFTER it has gone through a bad spell!
Jack Schwager, the author, and futures industry icon did an intriguing study on managed futures in his excellent book Managed Trading Myths and Truths. In it, he found that many winning CTAs have many losing clients! The reason is clear. Most winning CTAs produce a “stair-stepping” pattern higher, a series of peaks and valleys on the way up. What Schwager’s study found was that many people would buy into that strategy on a peak, right after a winning streak. Then, when the inevitable pullback or valley came, they would exit at a loss! So despite the trading system or CTAs long term winning track record, many clients lost money investing in it. In Schwager’s opinion, this was “the single biggest investor blunder.”
We are not implying that investors should invest in a losing manager. Rather, they should separate deciding who is an excellent manager (or trading system) from timing WHEN to get into that program. Once again, the best time to get into a decent program is frequently often after it has gone through a losing period.
So the question becomes, how can investors find a suitable trading system or Commodity Trading Advisor if viewing past performance alone is not robust enough?
We will explore the subject of finding a suitable trading system or CTA in part two of this series.
By: Dean Hoffman
FUTURES TRADING IS NOT SUITABLE FOR EVERYONE AND PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF SUBSTANTIAL LOSS IN FUTURES TRADING OR WITH ANY TRADING SYSTEM OR PROGRAM. CAREFUL EVALUATION OF YOUR PERSONAL FINANCIAL SITUATION MUST BE DONE PRIOR TO DECIDING TO TRADE IN THE FUTURES MARKETS OR ANY GIVEN TRADING SYSTEM OR METHODOLOGY.
