The Ins & Outs of Using Managed Futures

The Barclay Commodity Trading Advisor Index may be one way for advisors and clients to go

Diversification remains the Holy Grail when it comes to managing client portfolios. An ideal diversifier would provide low-volatility, largely positive returns and low or negative correlations with clients’ existing assets, since the goal is to achieve an improvement in the portfolio’s risk-adjusted returns.

A recent white paper from San Francisco-based Forward Management makes the case that managed futures can accomplish those goals. Their argument: the Barclay Commodity Trading Advisor (CTA) Index has produced long-term returns that match the S&P 500 Index and outperformed the Barclays Capital U.S. Aggregate Bond Index.

During the 1980-2011 period, the CTA Index was slightly less volatile than the S&P 500. Plus, it has also significantly lower one-month maximum losses, as shown in the following table:

Comparison of Monthly Returns by Asset Class: 1/1/1980 – 12/31/2011

 

Annualized Return

Standard Deviation

Maximum Monthly Decline

Correlation to the S&P 500

Barclay CTA Index

   11.16%

15.07%

  -9.81%

0.01

S&P 500 Total Return Index

   11.06%

15.62%

-21.54%

1.00

Barclays Capital S.S. Aggregate Bond Index

     8.69%

  5.69%

  -5.92%

0.20

Source: Forward Investing

These results have attracted the attention of both investors and funds. Forward Investing notes that assets under management by CTAs grew from $10.9 billion at year-end 1990 to $37.9 billion by year-end 2000; that figure grew to $314 billion by year-end 2011.

Caveats are in order, of course. Unlike stock and bond indexes, the CTA Index is based on the results of a peer group of managers, not price changes in a set of securities. That means your clients can’t simply buy the CTA Index as they can a traditional securities index.

The white paper notes, “As a peer group index, the CTA Index reflects the results of a representative group of investment managers who employ diverse strategies within the managed futures category—not the performance of a certain group of securities. Thus, results vary widely among strategies, and investment managers’ degree of success is dependent on their individual strategies as well as on market conditions. Futures prices can be highly volatile, and individual strategies are likely to be substantially more volatile than the CTA Index as a whole.”

If you’re unfamiliar with managed futures funds’ strategies, the paper provides details on the main fundamental and systematic approaches to trading. 

Another challenge: Most CTAs are structured as limited partnerships, and investors must be accredited or Qualified Eligible Participants.

The emergence of managed futures mutual funds is improving access and reducing the cost of investors’ fees, as well. The white paper reports that as of May 31, 2012, 31 mutual funds had attracted $9 billion of assets under management.

Forward launched its own fund earlier this year, the Forward Managed Futures Strategy Fund (FUTRX).

According to the firm’s press release, the fund “is designed to generate positive returns in varied market environments while maintaining low correlations to major stock, bond and commodity indexes. The fund employs a systematic, trend-following approach that provides both long and short exposure to liquid futures contracts in four global asset classes-commodities, equities, bonds and currencies.”

The fund’s June 30, 2012 fact sheet states that the fund had $9.52 million of assets and a -6.32% return on investor-class shares.

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