The unique risk/return characteristics of Managed Futures are primarily the result of the diverse nature of the markets traded (many of which are non-correlated to traditional investments), as well as the ability to go long or short with equal ease. Of particular note is Managed Futures’ ability to provide “crisis alpha” within a portfolio.
. . . said another way, Managed Futures has the potential to perform positively when traditional investments, such as stocks and bonds, perform poorly.
First and foremost, Managed Futures offers the ability to go long or short with equal ease; therefore, CTAs can profit during either bull or bear markets simply by buying or selling in the futures markets.
Second, CTAs participate in a wide variety of financial and commodity markets, many of which are non-correlated to both traditional investments and each other. Therefore, the performance of CTAs is not solely dependent upon trends in stock and bond markets.
Third, the futures markets enjoy certain structural advantages – they are extremely liquid (even in the face of a crisis), the contracts for a given market are standardized, trading P&L is marked to market daily, a well-funded clearing house stands as the counterparty to each trade and futures margin requires no borrowing of any kind.
Lastly, the majority of CTAs utilize systematic trading models, which generally exhibit no long equity bias and are less susceptible to behavioral biases and emotional decision making triggered by a crisis scenario.
In fact, while Managed Futures is generally non-correlated to stock and bond markets, Managed Futures is actually negatively correlated to stocks during stress periods – said another way, Managed Futures tends to generate positive returns when stocks generate negative returns.
Therefore, the effect of adding Managed Futures to a portfolio of traditional investments is a general reduction in annual volatility and significantly smaller drawdowns over time.
Managed Futures provided much needed positive returns to help mitigate and/or offset the effects of significant equity market declines.
Perhaps the best place to start our discussion is to ask, “What is Managed Futures?” Managed Futures is an asset class in which professional asset managers, commonly referred to as commodity trading advisors, or CTAs, trade a diversified blend of financial and commodity markets.
Generally, the financial exposures consist of exchange-traded futures contracts on the major global equity indices, government bonds, interest rates and foreign currencies.
While the commodity exposures include contracts on energies (crude oil, heating oil, gasoline and natural gas), metals (gold, silver, platinum, copper and aluminum), grains (corn, soybeans and wheat) and soft commodities (cotton, coffee, sugar, cocoa cattle and hogs).
The majority of CTAs utilize systematic trading models that rely heavily on computer-based algorithms and price-based inputs, while a minority of CTAs apply a discretionary approach based on the analysis of fundamental data.
The result is even more pronounced if we focus on the worst quarterly returns for the S&P 500 during the same period . . . here we see that Managed Futures generated a positive return in 11 of the 15 worst quarters for the S&P 500. Furthermore, Managed Futures out performed the S&P 500 in all 15 of those quarters – with the out performance ranging from as little as 4% to as much as 40%, and the average out performance being nearly 20%.
| Period | Event | S&P 500 | CTA | Diff |
|---|---|---|---|---|
| 4Q 1987 | Black Monday / Global Stock Markets Crash | -23.2%* | +16.9% | +40.1% |
| 4Q 2008 | Bear Market / Global Financial Crisis | -21.9% | +9.1% | +31.0% |
| 3Q 2002 | WorldCom Scandal | -17.3% | +9.4% | +26.7% |
| 3Q 2001 | World Trade Center & Pentagon Attacks | -14.7% | +4.1% | +18.8% |
| 3Q 2011 | Euro Debt Crisis | -13.9% | +1.6% | +15.5% |
| 3Q 1990 | Iraq Invades Kuwait | -13.5% | -2.1% | +11.4% |
| 4Q 2018 | Trade War Concerns | -11.9% | +6.0% | +17.9t% |
| 2Q 2002 | Bear Market / Technology Bubble | -13.4% | +8.5% | +21.9% |
| 1Q 2001 | Bear Market / Technology Bubble | -11.9% | +6.0% | +17.9% |
| 2Q 2010 | Sovereign Debt Crisis | -11.4% | -1.9% | +9.5% |
| 1Q 2009 | Bear Market / Global Financial Crisis | -11.0% | -1.8% | +9.2% |
| 3Q 1998 | Russia Defaults on Debt / LTCM Crisis | -9.9% | +10.6% | +20.5% |
| 1Q 2008 | Credit Crisis / Commodity Prices Rally | -9.4% | +6.4% | +15.8% |
| 3Q 2008 | Credit Crisis / Gov’t Sponsored Bailout of Banks | -8.4% | -4.1% | +4.3% |
| 4Q 2000 | DotCom Bubble Bursts | -7.8% | +19.8% | +27.6% |
Managed Futures represented by the Barclay Hedge BTOP50 Index. *Returns prior to Jan. 4, 1988 refer to the S&P 500 Price Index. Returns after Jan. 4, 1988 refer to the S&P 500 Total Return Index.
Past performance is no guarantee of future results. The referenced indices are shown for general market comparisons and are not meant to represent a particular investment. Investors cannot directly invest in an index; index returns do not reflect any fees, expenses or sales charges. Managed Futures involve risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments.
Historically, Managed Futures was available only via separately managed account or a private placement limited partnership. Today, however, Managed Futures are generally available in mutual fund format and are most effective when paired with a long-only equity trading component within a single mutual fund vehicle. Investors are no longer forced to time the market by choosing between stocks or Managed Futures; rather, alternative mutual funds enable investors to enjoy the best of both worlds by blending two non-correlated exposures within a single fund.