The results (of including managed futures) are so compelling that the board of any institution, along with the portfolio manager, should be forced to articulate in writing their justification in not having a substantial allocation to the liquid alpha space of managed futures. – John Lintner, Harvard Business School Professor

This Lintner quote has stood the test of time, with managed futures having shown that their main attraction is portfolio diversification and a durable increase in risk-adjusted return.

The success of managed futures as an alternative investment is well illustrated by the growth of the total assets under management by CTAs over the last 25 years:

Managed Futures AUM

The size of the Managed Futures industry, measured by Assets Under Management has expanded rapidly since 1990, by a factor of 100.

Top 5 Reasons for Managed Futures

1. Portfolio Diversification: Increase Returns and Reduce Volatility

One of the main attractions of managed futures investing is the risk-adjusted performance improvement it can bring to an investment portfolio.

To illustrate the diversification benefits that investors can gain from adding exposure to managed futures in traditional portfolios, we simulated different portfolio compositions and measured their performances:

100% US Equities1 100% Managed Futures2 Traditional (60% Equities1 / 40% Bonds3) 80% Traditional / 20% Managed Futures2
CAGR 9.65% 7.09% 8.69% 8.55%
MaxDD 50.95% 11.94% 29.86% 22.68%
Std Dev 14.64% 9.04% 9.29% 7.35%
MAR 0.19 0.59 0.29 0.38
Sharpe 0.45 0.45 0.61 0.76

Adding a 20% managed futures exposure to a traditional portfolio gives a substantial improvement: it reduces the Max drawdown by 24% and increases MAR and Sharpe ratios by 31% and 24% respectively.

Period: 1990-2014. Data used:
1. US Equities: S&P 500 Total Return
2. Managed Futures: Barclay BTOP-50 for period 1990-1999, Newedge CTA Index 2000-2014
3. Bonds: Vanguard Total Bond Index Fund (VBMFX)

2. Futures as an Investment Vehicle:
2. Numerous Liquid Trading Opportunities in Global Markets

World Trading Map

Transparent, liquid and centrally cleared

One of the main qualities of managed futures is their use of a financial product — the futures contract — that is very transparent, liquid and centrally cleared. Unlike most other alternative investments, futures offer a great way to gain access to market risk/exposure, with very limited liquidity risk or counterparty risk.

Global = more trading opportunities

The global aspect of futures markets gives access to numerous potential sources of profit all around the world — with the ability to go long and short in multiple sectors and a wide range of products in mainstream and smaller, more exotic markets, which can be very profitable (from New Zealand rates to South African Maize, Palm Oil in Malaysia or Japanese Rubber as examples).

2008 Crisis: Proving Ground

The aspects highlighted above are one reason why managed futures were a clear winner in the 2008 global liquidity crisis and crash, posting the best returns in decades (several well-established managed futures programs returning between 50% and 100%4)

Possibly a positive-sum game for futures speculative traders

Futures trading is usually described as a zero-sum game. While this is true at a global level, the futures markets have two clear distinctive types of participants: hedgers and speculators.

It can be argued that commercial hedgers are globally buying insurance (price risk) in the futures markets and, as a group, pay the equivalent of an insurance premium to the markets. Speculators (traders and investors), on the other hand, are assuming the price risk and providing liquidity and, as a group, collect this “insurance premium”. From this argument, it follows that futures speculators, such as managed futures investors, take part in a positive-sum game.

3. Access to Trading Talent

Hands-off Performance

One of the main advantages of a managed futures program is the complete hands-off access to strategies used by a manager dedicated to providing outstanding performance.

It is possible for the individual investor/trader to develop a futures trading strategy, or even leverage existing systems (like the ones we provide to our trader clients). These strategies and systems perform relatively well compared to managed futures program or CTA indices. But these usually require more active involvement and do not benefit from years of research and development by experienced managers.

Flexible Leverage and Volatility Targets

Another aspect of managed futures is the possibility to modulate the leverage and volatility to aim for an aggressive or more conservative performance target.

The managed futures indices mentioned at the beginning of this article are good to track the general performance of the sector relative to other asset classes, but they are tied to the volatility levels of the big funds, which represent a large part of these indices returns, and which have strong focus on reducing volatility to meet institutional investor requirements. Some CTAs offer more aggressive performance profiles. Additionally, notional funding is another option to add extra leverage.

Contact Us for Recommendations

If you are seeking a more passive way to add exposure to CTA performance in your portfolio, a good managed futures program is one of the best options. Contact us to discuss your requirements. We will be happy to recommend the programs that are best suited to meet, and hopefully exceed, your needs.

4. Low Correlation

One of the main reasons managed futures can provide benefits to investor portfolios is due to their low correlation to other major markets or asset classes.

S&P 500 TR Bonds Managed Futures
S&P 500 TR X 0.11% -0.09%
Bonds 0.11% X 0.21%
Managed Futures -0.09 0.21 X

An impact of this low correlation means that managed futures do not get dragged down by equity markets when these perform badly. As the chart below shows, managed futures have tended to return overall positive returns during the worst months for equity markets.

Managed Futures during  25 Worst S&P 500 Months

Managed futures are positive in worst negative equity markets…

However the lack of correlation does not mean negative correlation, or that managed futures perform badly when other markets perform well. As shown below, managed futures are still slightly positive during best months for equity markets.

Managed Futures during  25 Best S&P 500 Months

… and stay positive in best equity markets.

Average Monthly Return
S&P 500 Managed Futures
Worst 25 Months -8.16% 2.04%
Best 25 Months 7.95% 0.1%

5. Benefiting from Market Crisis

Far from being exceptional events, crises are an integral part of the markets. Empirical evidence shows that market crises occur at a much higher frequency and magnitude than expected by most models. It can be argued that crisis is the modus operandi of the markets, that it is part of their fundamental nature.

Would it therefore make sense to allocate to a strategy that can navigate and thrive through these crisis periods?

In her paper In Search of Crisis Alpha5, Kathryn Kaminski shows that managed futures have consistently delivered crisis alpha. She concludes that:

The structure and style of managed futures strategies make them more adaptable during situation of market crisis. The adaptability of these strategies allows them to profit from the persistent price trends which accompany these events — delivering crisis alpha to their investors.

2008 is the most recent illustration of a (deep) crisis that took most market participants by surprise. Managed futures clearly benefited from the turbulent market conditions, being the top strategy/investment category for that period.

But, as 2014 showed, managed futures can also thrive in non-crisis environments.

An all-weather strategy, really.

Managed Futures Database

With Wisdom Trading’s managed futures database, we help you select the right professional Commodity Trading Advisor to manage your account. We’ve selected the industry’s leading managed futures programs in our database, in which you can:

  • Analyze and Download Full Performance Reports
  • Filter Programs via a Powerful Search to Fit Your Investment Criteria
  • Save Programs to a Watchlist to Track Managers
  • Build Custom Portfolios and analyze their performance

Free Access to the database:

 

Detailed Report Sheet for Each Program

Along with the program’s strategy description and manager bio, the report sheet contains detailed info, with charts and stats analysis:

program-screenshot

The report can also be downloaded in PDF format.

Powerful Search Functionality

Type of strategy, Risk and Return stats or portfolios composition are all filters available to refine your CTA search to match your own investment criteria amongst the hundred of funds selected by us in the database.

cta-search-50

Save your custom search for later use.

Create Your Own Customized Watch List

Add any managed futures programs you want to to track, and access the watchlist screen giving an overview of the latest performance.

cta-watchlist-50

 

Simulate and Track Portfolios

Create portfolios with allocations to different CTAs from the database and/or upload your own instrument data.

portfolio

Each portfolio can be viewed in the same report format as individual funds with complete stats and analysis, and an option to download the report in PDF format.

Access the Managed Futures Database

Start searching for managed futures programs, analyze performance, create watchlists and portfolios by creating an account below.

 

Track Managed Futures Performance

Want to keep updated on the performance of the managed futures sector?

Follow the sector by receiving monthly updates via our “Managed Futures Report”. This is a “straight-to-the-point report”, giving you the performance of the largest managed futures programs and main index returns every month (check a sample report).

To receive the updates, simply fill in the form below:

Footnotes

4. A few examples: Altis Partners +51.93%, Clarke Capital Mgt +95.53%, Dunn Capital Mgt +51.47%, Hawksbill Capital Mgt +96.38% — source: altegris.

5. In Search of Crisis Alpha: A Short Guide to Investing in Managed Futures — Kathryn M. Kaminski

Disclaimers

Risk Disclosures

Commodity Trading involves substantial risk of loss and is not suitable for all investors. Any performance results listed in all marketing materials represents simulated computer results over past historical data, and not the results of an actual account. All opinions expressed anywhere on this website are only opinions of the author. The information contained here was gathered from sources deemed reliable, however, no claim is made as to its accuracy or content. Different testing platforms can produce slightly different results. Our systems are only recommended for well capitalized and experienced futures traders.

CFTC-required risk disclosure for hypothetical results

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.