Matt Osborne, a well-known expert in managed futures, grew up in New Zealand. He has that easy-going “Down Under” affability, which probably explains why he’d be the last person to say, “I told you so.” So I’ll have to say it for him.
Two years ago, Osborne wrote a white paper for Altegris predicting better times for managed futures. After their worst three-year performance in history, he said managers would get their mojo back as the world’s central banks went their separate ways. As central bank policies diverged, trends would re-emerge in currencies, commodities and, of course, interest rates, he said.
“A bedrock principle of managed futures is that they simply require persistence of trends in either direction to potentially deliver strong returns,” Osborne observed. He suggested that instead of pulling money out, investors should consider allocating more assets to the strategy. Osborne called it right. The Altegris 40 Index, which tracks the 40 leading managed futures funds, posted a 15% gain in 2014.
After the strong performance by managed futures this January, I checked in with Osborne to get his outlook. Memories are short in this business, but it’s hard to forget that January got off to a terrible start for stocks, resulting in the worst 10-day opening of a year for the Dow since 1897, according to CNN, finishing the month down 5.5%. Managed futures, by contrast, posted an average 3.48% return in January. I wanted to know if Osborne thought managed futures’ January run was a fluke or a continuation of 2014, particularly since 2015 returns were essentially flat.
“I think the potential for gains in managed futures exists now for the same three reasons I cited in 2014, only more so,” Osborne said. “Central bank policies will continue to diverge, technicals are improving and the ability to analyze commodities based on fundamentals matters again.”
As the Fed gingerly raises rates in the U.S., central banks elsewhere are striving to stimulate their economies. They have resorted to quantitative easing and even the groundbreaking tactic of negative interest rates (for more on negative interest rates and how they could affect client portfolios, see this month’s cover story). As Mohamed El-Erian points out in his new book, “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse,” as central banks run out of weapons, they would logically look to politically enacted fiscal policy for their next act. However, political paralysis blocks movement in that direction. What is left? Currency manipulation.
“Currencies are the release valve of central bank policy divergence,” Osborne said, meaning we can expect a new round of currency wars to break out. As the focus on currencies intensifies, trends will re-appear. Trends, Osborne observed, are the oxygen in the blood stream for so-called trend followers, those managers who rely on complex financial models and computer algorithms to spot moves in stocks, bonds, commodities and currencies. We estimate that trend followers managed about 75% of the $327 billion in managed futures as of the end of 2015. Osborne thinks the strengthening U.S. dollar and weakening currencies in Canada, the U.K., Australia and emerging markets look as if they are trending.
One other aspect of managed futures that may be re-awakening is investing in gold. Dubbed the “barbarous relic” by John Maynard Keynes, the yellow metal may occupy a more central role in managed futures portfolios thanks to negative interest rates.
“Gold has a positive carry compared to negative interest rates,” said Osborne. In other words, investors holding gold don’t have to pay a bank for deposit privileges. This could make for a longer and deeper interest in gold, in addition to how it is usually perceived as an inflation hedge and safe haven.
A key aspect of managed futures’ long-term profile is its track record and ability to generate profits through a wide array of market cycles, and especially during crisis periods. Let’s see what happens to these markets as central banks’ policies diverge, volatility stays high and trends continue to re-emerge.
— Read Will SEC Crash the Liquid Alts Party? on ThinkAdvisor.