Here’s a story in the Washington Post by David Evans that illustrates how Wall Street’s cutthroat fee practices have remained unchanged over the decades, and worse, that its customers remain as gullible as before.
A managed futures fund, Morgan Stanley Smith Barney Spectrum Technical LP, raised $797M from over 30,000 investors between 2002 and 2012, and generated trading profits of $490.3M in that period. But ironically, none of that flowed into the pockets of the fund’s trusting investors – instead they lost $8.3M.
Yost Partners was up 0.8% for the first quarter, while the Yost Focused Long Funds lost 5% net. The firm's benchmark, the MSCI World Index, declined by 5.2%. The funds' returns outperformed their benchmark due to their tilt toward value, high exposures to energy and financials and a bias toward quality. In his first-quarter letter Read More
How did that happen?
“Return-robbing” fees, commissions and expenses were charged to the fund, says the Post article, that’s how.
Investors: Lambs to the slaughter
In a crushing insight on how blindly investors trust their advisors, the article says the investors would have instead earned a net cumulative return of 96% had they invested the same money in a low-fee index mutual fund during that period.
Data cited by the article shows this rip-off was an industry-wide phenomenon: “According to data filed with the Securities and Exchange Commission, 89% of the $11.51 billion of gains during that decade in 63 managed-futures funds went to fees, commissions and expenses.”
Wall Street: It’s never different
A 1955 classic authored by Fred Schwed, Where Are the Customers’ Yachts?: or A Good Hard Look at Wall Street, refers to a humorous story about a New York visitor who stood admiring the yachts owned by bankers and brokers. He asks, “But…where are the customers’ yachts?”
It’s not hard to understand why there were none, considering the blatantly outsized fees hapless customers paid such as in the managed futures fund cited above.
Not surprisingly, the revelations in the above article acted as a catalyst for an investigation of various fund managers, brokers and advisors of managed-futures funds regarding allegedly excessive fees associated with those funds and potential conflicts of interest by attorneys Keller Rohrback LLP.
“Our investigation focuses on whether the terms and the fees associated with these funds violate any laws and whether the fund managers, brokers, and advisors of the managed-futures funds are properly disclosing the terms and fees associated with the investments,” says the press release from the firm.
In a stunning statement, the press release also alleges, “And as if excessive fees are not enough, some managed-futures funds allow their managers to make undisclosed “side-bets” by trading ahead or opposite the fund’s trades—an obvious conflict of interest.”
What’s the fuss about – managed futures funds 101
The expose might well result in a cleanup and the institution of better practices as well as more transparency in managed future funds.
If you are still interested, here’s the lowdown on managed futures (courtesy of Managed Funds Association).
- These are investments run by professional money managers using futures, options and swaps to trade markets such as fixed income, stock indices, currencies, and commodities, with the goal of maximizing returns from market cycles.
- Investors could use vehicles such as a commodity pool, managed account or a mutual fund.
- These strategies serve as a useful diversification tool and are claimed to have outperformed stocks during periods such as the 2008 crisis.
- Commodity Trading Advisors (CTAs) and Commodity Pool Operators (CPOs) who advise or offer managed futures investment strategies are regulated by the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA).
- Fees charged by managed futures funds are clearly and prominently disclosed in the funds’ disclosure document, as well as in monthly account statements received by investors. All performance reported by managed futures funds is required to be reported net of all fees and expenses.
Read about this in more detail here.