Over the two decades I’ve spent in managed futures, I have been asked the same three questions repeatedly: “What’s the track record for managed futures?” “How will this asset class perform over the next few years?” and “How much should I allocate to managed futures?”
I was flooded with the first question when the curtain came down on 2008 and investors compared the 37% decline in the S&P 500 with double-digit gains in managed futures. Investors wanted to know if managed futures’ performance was a fluke, or did this asset class always zig when stocks zagged.
Historically, managed futures strategies have had mostly positive annual returns, according to BarclayHedge’s CTA Index. But three consecutive years of drawdowns — in 2011, 2012 and 2013 — prompted several market commentators to question the benefits of a managed futures allocation, with some suggesting that investors abandon the strategy altogether.
In 2014, however, the tide turned, and for the past two years the strategy has outperformed stocks (see table below). The S&P 500 Total Return Index is up 11.8% over the two years ended June 2016. Meanwhile, the Société General (SG) CTA Index, a broadly diversified group of the largest managed futures managers, is up 19.3%.
Of course, future returns are impossible to predict, and past returns don’t necessarily reflect the future. However, the same economic conditions exist today that led me to think optimistically about managed futures two years ago. Then, as now, I thought that trends would re-emerge in currencies, commodities and interest rates that would give managers of this asset class a chance to show their stuff. For example, most managed futures managers I interact with have been consistently short the euro for over two years as their overall expectation was that it was trending down, despite several recent quarters. Recent trends in precious metals and bonds have added to my level of conviction.
Lastly, I’ll address the age-old question posed to me by institutions, advisors and their clients: “How much to invest?”
The standard answer is typically “somewhere up to 10%,” which I’ve given myself on numerous occasions. Many studies have shown that a long-term allocation to managed futures can increase the overall Sharpe ratio of a portfolio due to the well-documented benefits of zero correlation.
An equally important question, though, is “What is the long term?” It is a widely held notion among experienced managers that any period shorter than five years doesn’t give a good picture of the benefits. We would be unwise to single out just the last two years’ results — when managed futures have done well — as evidence of the long term.
To achieve true statistical validity, I recommend using a series of rolling five-year periods going as far back as possible, which in the case of managed futures means back to 2000. I’ve concluded that the potentially best mix of S&P 500 equities to managed futures would have been 40/60 — a very new take on the old 60/40 rule!
— Read Managed Futures Got Their Mojo Back on ThinkAdvisor.