Here Is Perhaps the Single Biggest Ripoff on Wall Street
Do you or a loved one have an investment account—perhaps for retirement? Is any of that money invested in a "managed futures" fund? If so, stop reading now and pull that money out immediately. It is being stolen from you as we speak.
To be clear, we are not talking about some sort of fly-by-night scam, something you might get in a spam email or a poorly copy-edited flier handed out in the street. These are well-established and completely legal investment vehicles peddled by the biggest firms on Wall Street—Bank of America, Morgan Stanley, and many others. They're marketed not only to the very rich, but also to common small investors like you who may be looking to liven up your portfolio a bit. In the new issue of Bloomberg Markets, David Evans looks into the performance of these managed future funds and finds something noteworthy: they are essentially little more than licenses to soak you for everything you're worth.
Managed futures funds are essentially a type of of hedge fund that invest partly in futures contracts. But whereas standard hedge funds charge annual fees of 2%, along with 20% of profits (and are rightly criticized as too expensive), managed futures funds charge up to 9% annually, along with 20% of profits. In order to justify such astoundingly high fees, managed futures would have to be the single best investment in the world. Spoiler: they are not!
One basic principle of investing is: you don't really know which investments are going to do well. The only thing you can really control are the fees you pay. So be sure to pay low fees. Managed futures, as a class, stand in direct opposition to this basic principle. Do these funds make profits? Yes, plenty. Do the people who invest their money in these funds make profits? Nope, not really. Almost all of the profits go directly into the profits of the people that run the funds, as fees.
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.
Yes: nine out of every ten dollars of profit on your money goes to the person managing the fund. This is what is commonly referred to as "a huge ripoff."
Other problems with managed futures detailed in the story include poor disclosures, and even fund managers who actively bet against their own investors. But the main thing you should know is: never invest in "managed futures," ever. And while you're at it, pull your money out of big Wall Street firms entirely and put it all in low cost index funds.
This is just one more example of the fact that Wall Street exists as a giant mechanism designed to extract rents from the population at large and funnel those rents into the pockets of Wall Street employees. Stay away from Wall Street, in general.