Managed Futures and Fixed Income, Part 2: Odd Couple of Diversification

This is the fifth in a series of blogs exploring the use of liquid alternatives by advisors, based on reporting conducted among advisors for the August 2014 Investment Advisor cover story, Alts Are the Answer.

As we discussed in our last blog, “Can Managed Futures be an Income Investor’s Best Friend?,”  managed futures offers significant diversification potential for investors in high-yield bonds. We now shift our attention to other areas of the credit curve.  

The table below shows the performance of managed futures (as measured by the Barclay BTOP50 Index) during the ten worst drawdowns for the Barclays Investment Grade Bond Index since January 1987. Generally speaking, the longer the losing period for such bonds, the more diversification potential is afforded by managed futures.

Table 1: Performance of Managed Futures (BTOP50 Index)
During Deepest Barclays Investment Grade Bond Index Drawdowns

 

Depth

Peak

Trough

Months

BTOP50

1

-15.4%

2/29/2008

10/31/2008

15

2.3%

2

-6.8%

1/31/1994

6/30/1994

14

5.7%

3

-6.2%

2/28/1987

9/30/1987

10

22.3%

4

-5.0%

4/30/2013

6/30/2013

11

-2.9%

5

-4.6%

5/31/2003

7/31/2003

6

-4.2%

6

-4.2%

1/31/1996

5/31/1996

8

-2.9%

7

-4.0%

1/31/1999

8/31/1999

17

5.8%

8

-3.8%

3/31/2004

5/31/2004

4

-5.6%

9

-2.9%

8/31/2005

5/31/2006

11

7.0%

10

-2.4%

11/30/1996

3/31/1997

5

4.1%

           

Avg.

-5.5%

   

10.1

3.2%

Source:  Bloomberg, QES.

The same conclusions can be reached when the analysis shifts to municipal bonds as shown in Table II below:  

Table 2: Performance of Managed Futures (BTOP50 Index)
During Deepest Barclays Municipal Bond Index Drawdowns

 

Depth

Entry

Exit

Months

BTOP50

1

-8.3%

1/31/1994

11/30/1994

13

3.9%

2

-6.5%

2/28/1987

5/31/1987

10

17.6%

3

-6.2%

4/30/2013

8/31/2013

11

-5.2%

4

-5.7%

8/31/2008

10/31/2008

5

4.9%

5

-5.0%

8/31/2010

1/31/2011

10

4.0%

6

-4.6%

1/31/2008

2/29/2008

6

4.8%

7

-3.9%

5/31/2003

7/31/2003

5

-4.2%

8

-3.6%

1/31/1999

1/31/2000

16

4.5%

9

-3.1%

2/29/2004

5/31/2004

5

-6.4%

10

-2.3%

1/31/1996

5/31/1996

7

-2.9%

           

Avg.

-4.9%

   

8.8

2.1%

Source:  Bloomberg, QES. 

One should note that the test period has been unusually kind to fixed income investors. Robust economic growth, however, could put upward pressure on rates—and even credit spreads—events that would favor a hedged approach to portfolio construction. 

We are writing a more comprehensive research note on the relationship between fixed income investing and managed futures.  If you are interested in seeing the results, please email me at ben@qesinvest.com.

---

View all of the blog postings in this series, Ben Warwick on Liquid Alts, including Investment Advisor's August 2014 cover story, Alts Are the Answer.

Reprints Discuss this story
This is where the comments go.