Don’t invest in managed futures because you think you are guaranteed to make money if there’s a sell-off in the stock market. You might be disappointed. In my opinion, invest in managed futures because the strategy has shown itself to be a valuable portfolio diversifier over the past 30 years.
Managed futures have earned a reputation for zigging when the stock market zags, and historically that’s been true. Pick a financial crisis over the past 30 years — the 1987 crash, the Russian ruble devaluation, the tech wreck, the 2008 meltdown — and it’s understandable why the strategy often gets referred to as “crisis alpha.”
(Related: What is Alpha and Why Do We Care?)
But there are two challenges with that label. First, it does managed futures a disservice because the name undervalues the strategy’s record in good times as well as in bad times. During the massive bull market from 2003 to 2007, a non-crisis period, managed futures posted gains every year, according to the SG CTA Index.
More recently, in 2014, managed futures had double-digit returns as trend-following managers (who run about 70% of the managed futures funds) rode the wave of falling oil prices, rising European stocks, an upward-trending U.S. dollar and rising U.S. bond values. The S&P 500 Total Return Index, meanwhile, gained 13%. It was another powerful demonstration that, despite what many people think, managed futures are typically non-correlated to the stock market and not negatively correlated. Non-correlated returns mean just that — the strategy goes its own way.
Second, while “crisis alpha” has contributed to managed futures’ returns over the years, the crisis typically must last long enough for a strong, sustainable downtrend to develop. The first alarms of the 2008 financial crisis sounded a year earlier with the June 2007 collapse of the two Bear Stearns funds that had speculated in subprime mortgages. The bull market momentum faded in late 2007 and the ensuing crisis unfolded slowly enough to give trend followers time to put on short positions. The bear market was not only deep, but also lasted long enough for managed futures managers to achieve results on those shorts.
Importantly, it is not just successfully capturing downtrends in stocks that have contributed to the crisis alpha label. In 2007-08, there were significant trends in other assets such as crude oil, fixed income, the Japanese yen and other currencies that contributed to returns for managed futures.