It’s easy to forget that 2008 was a breakout year for many managed futures strategies. That was the case not because returns for the space were not only positive but also were altogether non-correlated in a historically volatile market. It’s easy to forget because the same strategies that were so loved after 2008’s performance are now being questioned after their dismal performance across the past two years. That so many investors—many of whom were drawn to the asset class not that long ago—are disappointed today brings to light the misconceptions that continue to surround the managed futures strategy.
It’s true that since the beginning of 2011, managed futures have not only lagged global equities and fixed income in a material way, but the category has underperformed hedge funds as well (see chart below).
So why shouldn’t investors be upset? They shouldn’t because managed futures—unlike equities that tend to follow earnings growth and valuation expansion or fixed income that tracks interest rates—typically employ trend-following strategies that attempt to benefit from either long- or short-term momentum movements across or within global asset classes.
Some strategies have exposure to only one asset class or trend type (which warrants significant due diligence before investing) but in many cases, managed futures managers are trying to buy and sell futures based on a directional trend in multiple asset classes.
Since there have been no major trends across asset classes over the last two years (see chart 2 at left), it should come as no surprise that trend-following strategies, i.e., managed futures, have not performed well.
The fact is that we’ve had choppy and trendless markets since the beginning of 2011.
A Short-Term Trend Is Not a Friend, but a Long-Term Trend…
The question that really matters, then, is whether exposure to managed futures is warranted in the current market environment.
We know that relying on previous performance is often dangerous when trying to compound capital; just ask anyone who invested in managed futures two years ago. But the category’s relative short-term underperformance should not be surprising given its historical results.
Over the last 15 years, managed futures have underperformed global equities on a two-year rolling basis seven times, and by a noticeable amount: 10.6% on average (see chart 3). Yet the category has outperformed global equities by 2.0% over all the rolling time periods for the same 15 years.
In other words, the main tenets for investing in managed futures strategies have not changed. It’s true that managed futures strategies need consistent trends before they can produce strong performance, and we know that in the short run markets will not always be trending. But the long-term profitability potential of managed futures not only opens the possibility of creating excess returns in an investor’s overall portfolio, it may reduce the volatility of those returns as well.