We are convinced that managed futures is the single most valuable diversifier investors can add to a portfolio of stocks and bonds. We believe it provides more “bang-for-your-buck” than private equity, private credit, REITS, commodities and many other widely used alternatives.
Since 2000, managed futures – as measured by the SG CTA Index, which in our view is the best source of long-term data on the space – have demonstrated 1) strong relative returns, 2) a low correlation to equities and bonds, and 3) an ability to deliver positive returns during periods of market stress.
With stocks and bonds moving in tandem for the first time in decades in 2022, the diversification benefit was even more acute: a 10% allocation in 2022 would have cut losses in a global 60/40 portfolio by more than a fifth over the calendar year.
Managed futures is an investment strategy that hunts for trends in dozens, or hundreds, of assets for which there are futures contracts, such as crude oil, bonds, equities and Japanese yen. In other words, if crude oil is rising (or falling), a hedge fund manager might go long (or short) with a futures contract and bet that this trend will continue. Firms use quant models to study past prices to decide what to buy and sell, and then diversify across commodities, rates, equities and currencies. As markets (and prices) shift, these managers tactically move around – hence ‘managed’, unlike buying and holding gold. They use futures because this is an extremely liquid and efficient way to bet on these price moves. Think of it this way: managed futures funds take advantage of market waves. The best time to do this is when significant market movements cause extreme volatility, like in 2022 and to a lesser degree this year; in other words when markets are choppy and they bounce around but don’t make much forward progress. The good news is that there are always waves, and managed futures funds are a potential way to make money from them.
In 2022, most managed futures funds detected the signs of inflation early, repositioned portfolios quickly and rode the wave. That kind of alpha generation, we believe, is not going away any time soon. You can think of managed futures as outsourcing a portion of your portfolio to a tactical strategy that might find trades – in 2022, shorting Treasuries and the yen were trades that generated great returns – many investors may not be able to do on their own, therefore using a managed futures strategy to the portfolio makes so much sense.
A “quantitative, long and short, leveraged derivatives-based strategy” conjures up images of blow ups, yet the SG CTA Index has had volatility of around 9% since 2000, about halfway between equities and bonds. More tellingly, over the same time period, the maximum drawdown is -14%, less than a third of equities and now, even less than bonds. There is a good reason for this. Managers diversify across markets and size positions prudently – after all, they don’t want to blow up either. Their models also ruthlessly cut losing positions to avoid a white-knuckle ride, which some fundamental investors can go through. Finally, futures contracts are highly liquid, so funds can exit positions when they need to. The short explanation is that many fears about managed futures are overblown.
Last year, the managed futures asset class was up 20%, from an asset allocation perspective, we believe that the asset class has potent long-term diversification benefits. Moreover Managed Futures strategies are available in liquid form via UCITs structures.
(The author of this article is Marcus Queree, Partner & Director of FundStream. Any information herein is only expressions and opinions. This document does not constitute an offer, an invitation to offer, or a recommendation to enter into any transaction, nor does it constitute investment advice. The information contained herein is confidential and reproduction of any part of this material is prohibited. If you are in any doubt as to the suitability of an investment you should always consult your financial adviser. FundStream does not receive any form of compensation for circulation of such material.)
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