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Wall Street Proctology: Morgan Stanley Doctors Are In

Posted by Larry Doyle on October 10, 2013 9:02 AM |

With interest rates at artificially low levels (thanks to the Fed’s quantitative easing program) and investors increasingly leery of navigating into the shark infested waters of the high-frequency dominated equity markets, what is an investor to do?

More and more investors have been sold on the idea of allocating more capital to alternative investments. One needs to be exceptionally careful when engaging the practitioners engaged in these pursuits. Really? Oh yes.

In what might best be compared to a visit to an unlicensed proctologist, Bloomberg provides a wide angled view into the incredibly expensive and dark world of managed futures as practiced by the “doctors” at Morgan Stanley. (Caution: the mental images here may be upsetting)

The pitch was enticing. At a time when the Standard & Poor’s 500 Index had suffered a decline of 41 percent in the previous three years, Morgan Stanley (MS) was offering its clients the possibility of some relief.

In a prospectus, the New York securities firm invited its customers to put their money into a little-known area of alternative investing called managed futures.

“If you’ve never diversified your portfolio beyond stocks and bonds, you should know about the powerful argument for managed futures,” the bank wrote. “Managed futures may potentially profit at times when traditional markets are experiencing losses.”

Morgan Stanley presented a chart telling investors that over 23 years, people who put 10 percent of their assets in managed futures outperformed those whose investments were limited to a combination of stocks and bonds . . .

Clients jumped in. During the decade ended in 2012, more than 30,000 investors entrusted Morgan Stanley with $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP. The fund already had $341.6 million invested during the previous eight years.

Top fund managers speculated with that cash in a wide range of asset classes. In that period, the fund made $490.3 million in trading gains and money-market interest income.

Investors who kept their money in Spectrum Technical for that decade, however, reaped none of those returns — not one penny. Every bit of those profits — and more — was consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley.

After all of that was deducted, investors ended up losing $8.3 million over 10 years. Had those Morgan Stanley investors placed their money instead in a low-fee index mutual fund, such as Vanguard Group Inc.’s 500 Index Fund, they would have reaped a net cumulative return of 96 percent in the same period.

The “powerful argument” for managed futures turned out to be good for brokers and fund managers but not so good for investors.

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.

Pray tell, while those investors who ventured into the managed futures doctors’ offices were bent over and being probed, where were the regulators charged with overseeing these practices? In what are hard to believe statements for even the most naive . . .

“The big news here is, the fees are so outlandish, they can actually wipe out all the profits,” says Bart Chilton, one of five members of the Commodity Futures Trading Commission. Even though the CFTC oversees managed futures, Chilton says he hadn’t been aware of the effects of the high costs for investors.

“We absolutely need to do a better job of letting consumers know in plain English what’s going on,” he says. “Those numbers tell a story. It’s astounding.”

The impact of high fees on investors has escaped the notice not only of regulators, but also some industry executives.

And we are supposed to believe that bull$*^#?

Well, just how high are the fees?

Brokers have an incentive to keep clients in managed-futures funds because they receive commissions annually of up to 4 percent of assets invested, prospectuses show. Investors pay as much as 9 percent in total fees each year, including charges by general partners and fund managers.

9 points in fees??

The lesson here is clearly that investors should ask for a TOTAL breakdown of ALL fees, charges, loads, commissions prior to entering into any transaction. And get it in writing.

But given that 30,000 investors and close to $800 million found its way into this MS “practice,” these fees are truly the equivalent of the prophylactics used while regulators are in bed with their industry partners.

I thank the regular reader who brought this story to my attention.

Navigate accordingly.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Matt

    Reminds me of the Fund of Funds concept pushed by Wall Street’s finest—a hedge fund invested in hedge funds. Each of the constituent funds charges the famous “2 and 20″ (2% of assets under management and 20% of profits annually)and “2 and 20″ charged by the umbrella fund. These are nothing but fee extraction machines which make it all but impossible for a client to make any money at all let alone a fair rate of return. But they’re legal under current law, which I guess makes it OK to sucker in the investing public!

  • Van

    LARRY

    THE BEST ADVICE I CAN GIVE ANYONE WHO IS CHASING MONEY,AS MOST ARE,IS TO WORK AT WHAT YOU ENJOY,TAKE THE INCOME SURPLUS, AND INVEST IN THINGS YOU CAN WALK ON OR HOLD IN YOUR HAND.

    LET THOSE WHO CHASE MONEY,SWIM IN THEIR OWN (YOU KNOW
    WHAT)THAT IS WHAT THEY ARE DOING.

    THE SMELL MUST BE HORRIBLE.

  • Ed

    Today articles surfaced how REITs pose threats to the economy and more “oversight” is needed. Politicians, regulators and commissions are always willing to stand up and say “we got this”.

    They don’t, they add complacency and that poses a threat to the economy. I could be wrong:-)






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