Schwager on Futures: Managed Trading Strategies
Summary
Jack Schwager wrote this volume of his futures series on managed futures, meaning investment through commodity trading advisers who run systematic or discretionary programmes in futures markets. It is aimed at investors evaluating such programmes and at people building them.
The first part attacks common beliefs about the sector, which Schwager treats as myths: that managed futures returns are unusually risky, that past performance predicts future performance in any simple way, that the best measure of a programme is its return, that drawdowns should be judged against their historical maximum. He argues that risk and return must be assessed together, that the relevant question about a manager is what the return stream does inside a portfolio rather than in isolation, and that the low correlation between managed futures and equities is the reason to hold them.
The second part is technical. Schwager covers performance measurement and the problems with standard ratios, the construction of return and risk measures suited to non-normal distributions, the evaluation of track records including the length required to distinguish skill from chance, portfolio construction across multiple advisers, the effect of fees on realised returns, and the specific due diligence questions to ask. He also covers system development for those building programmes, including the dangers of over-optimisation. The book is honest about how little of the evaluation problem can be solved with data. It dates from 1996 and the sector has changed considerably, but the evaluation framework remains applicable.
Key takeaways 7
- Managed futures should be judged by what they contribute inside a portfolio rather than by their standalone return and volatility.
- A track record must be long enough to distinguish skill from chance, and most are not.
- Standard performance ratios assume normal distributions that managed futures returns do not follow.
- Past return alone is a poor selection criterion, and Schwager argues that risk-adjusted measures with drawdown analysis are the minimum.
- Over-optimisation in system development produces backtests that describe historical noise rather than any exploitable pattern.
- Low correlation with equities is the reason to hold managed futures, and it is also why holders abandon them during equity bull markets.
- Fee structures with incentive fees on gross rather than net-of-loss performance transfer more to the manager than investors realise.
Who should read it
Allocators evaluating systematic futures managers who want a framework for assessing track records and for judging what the strategy contributes to a portfolio.
About Jack D. Schwager
Futures research director and author; co-founder of FundSeeder; creator of the Market Wizards series
The Market Wizards interviews are a primary record of how top traders actually operate, cited across the field.
Where it sits in the reference 2
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