Know Your Roll – Commodity ETF Edition

The biggest macro-economic event in the past year has been the collapse in crude oil prices.  Since mid-July, WTI crude oil spot prices are down over 50%.

KYR1

Source: Bloomberg

Crude is the most liquid (no pun intended) and most analyzed commodity on the planet.  Its covered exhaustively by a wide array of shareholders and stakeholders; public and private oil producers and consumers, physical traders, banks, and geopolitical think tanks just to name a few.  This is why the most interesting aspect about this huge move in crude is that no one foresaw the magnitude or velocity of this decline.  Bloomberg had an article back in December on the hedging strategy of some U.S. shale drillers which showed that those companies certainly did not anticipate a decline in crude prices like what we’ve seen.

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Where has all the alpha gone?

Where has all the alpha gone (to paraphrase a 60’s protest song)? Roughly, alpha is the ability to consistently outperform a well-defined benchmark. Alpha is notoriously hard to measure as most managers do not have records long enough to establish “consistently.” That matter aside, there are at least three forces compressing our notion of alpha – better benchmarks, better information and better liquidity. The traditional long only investing world has been wrestling with this issue for years, but the notion is now moving to the alternative space.

In the 60’s and 70’s, academic research on mutual fund results indicated that a better benchmark definition (compare a manager to a small cap index if she owns small cap stocks) diminished the perceived value added in fund results. Over the last 20 years or so, there has been an unknown quantity of permutations of alternative beta, hedge fund replication, liquid alts, and other repackaged versions of the same theme – to figure out if there is beta in the macho alpha alternative space. Continue reading

Benchmarking Alternative Beta

The year 2015 will mark Mount Lucas’ 30th as an alternative investment manager. We formed as a CTA in the halls of Commodities Corporation in Princeton, New Jersey. Our particular mandate was to attract managed futures assets from the institutional marketplace. In doing so we became the first managed futures manager to register with the SEC as a Registered Investment Advisor. Just two years later our we created the MLM Index – the first price based index for Managed Futures – and possibly the first attempt at measuring alternative beta.

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