Montreal, Canada

What you see is not necessarily what you get. Beware of recently introduced managed futures funds. They’re not what they appear to be.

Managed futures, or Commodity Trading Advisors (CTAs), oversee about $300 billion dollars worldwide and have been popular among high net-worth investors since the 1980s when Richard Dennis pioneered a trend-following strategy called “Turtle Trading.”

CTAs trade on a long and short basis and usually run the gamut on over 125 global futures and options contracts, including interest rates, currencies, commodities and stock indices.

More than any other asset class, CTAs usually deliver impressive gains when just about everything else heads into the basement. That’s what makes them such an important portfolio diversification tool – especially during bear markets, dislocations and crashes.

Strategies that identify trend-following systems earned a bundle in the 2008 meltdown, with the Credit Suisse Managed Futures Index rising 18.3% compared to a crushing 42% loss for the MSCI World Index. The same patterns occurred from 2000 to 2002, 1998 (Long-Term Capital Management blow-up), 1990 and even in October 1987.

Unless you’ve got the big bucks, however, investors are better off avoiding the new class of managed futures funds available in the United States.

One such product is really a bad deal.

The Rydex Managed Futures Strategy Fund (RYMFX) shows a greater correlation to the S&P 500 Index since its inception than anything else.

Over the last 12 months, ending January 31, the Fund has gained a meager 1.4% compared to 15.7% for the Credit Suisse Managed Futures Index.

Since launch in March 2007, the Fund is up 2.1% per annum — a pretty lame return. And worse, in 2008 when managed futures enjoyed big gains as markets crashed, RYMFX gained just 2.8% compared to 18.37% for the benchmark.

The Fund states it tracks the S&P Diversified Trends Indicator. But to be sure, this index doesn’t track a basket of CTAs nor does it trade a strategy that’s consistent with trend-following or anything really resembling what a CTA is supposed to be doing.

According to Rydex’s marketing material, “This open-ended mutual fund provides long or short exposure to commodities and financial futures (no shorting energy). The fund’s benchmark uses a quantitative methodology based on moving averages of price trends.”

Over the last 12 months, commodities prices have gone through the roof. Everything has rallied, except natural gas. Whatever model employed by these guys certainly isn’t futures trading.

Wisdom Tree, an ETF leader using value and dividend-based models, also recently launched a managed futures fund. I suspect Wisdom Tree is offering something similar to Rydex with poor trading execution and in the end, poor performance.

In the United States, some of the best futures traders (who really trade futures) include John W. Henry, Chesapeake Capital, Dunn Capital and Tudor Jones. Investors have to pony big bucks to buy these legends but at least you’re getting what you pay for.