The Death of Managed Futures May be Greatly Exaggerated

It’s been a rough couple of years for managed futures funds.  The HFRX Macro Systematic Diversified CTA Index has been down 3 of the last 4 years (currently down -8% YTD).  A run like that in this industry puts you at risk of losing huge amounts of investment flows.  But Fortigent argues that the death of managed futures may be greatly exaggerated:

“Over the longer term, managed futures strategies have been a very consistent asset class. Despite encountering pockets of underperformance, the category as a whole has failed to post a negative three-year rolling return based on quarterly data since 1990.The index came close in early 2003, but surged back over the following four years.

While past performance is not a guide to future returns, the asset class does have a powerful long-term track record. Even if one were to assume performance never reached previous levels, however, managed futures’ diversification benefits remain intact. When considered in a broader portfolio context, managed futures can still play an important role in dampening volatility and providing a source of uncorrelated return. And this is in addition to the practical benefits contributed by one of the most liquid investment strategies in the industry.

While time will be the only true test, reports of managed futures’ death may be greatly exaggerated.”


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Here is a summary of the factors behind poor performance over the last 2 years:

    •A lot of policy maker interventions, cutting the markets’ tails and creating choppy markets
    •Low interest rates: although still profitable this sector had a reduced return potential over the last 12 months
    •Higher allocations to Managed Futures post GFC due to their liquidity and tail hedge characteristics
    •Higher correlation between markets and thus lower diversification benefits due to “risk on / risk off” cycles, policy maker interventions, higher allocations to the strategy etc.
    •Decreased volatility as a result of interventions

  2. I love these nonsensical defenses! After reading your first point on “choppy markets” causing poor returns, I was going to point out that these managers will credit volatility when they do well, but then curse volatility when they do poorly. But, in fact, you beat me to it with your last point! You have actually claimed that both high volatility and low volatility hurt performance. You are obviously shilling for this strategy, but let’s be honest; if they do poorly in high volatility and low volatility, just when is it that they do well?

  3. Going forward, I think there are two characteristics that determine the potential for managed futures:
    1) The growth in AUM to the space following 2008 as people chased an asset class that went up when everything went down. AUM doubled from $300B to $600B and it received a firm allocation in many portfolios as a tail hedge. Counterintuitively, I think this alone makes it unlikely for it to behave similarly the next time.
    2) Zero bound interest rates. Most managed futures strategy benefitted greatly from the collapse in interest rates. Call it the dominant trend. Most stragies claim that when the trend reverses and rates ultimately have to go up again they will be able to benefit; however, it isn’t too clear to me that when rates do finally go up that these strategies will be able to capitalize.

  4. If they are carrying a bulk of gross assets in Treasuries and short-term paper, maybe a hundred basis points of net interest income would benefit?

  5. Sorry MAtt for your misunderstanding, but choppy markets do not mean highly volatile markets.

    Most CTAs are trend-followers with a horizon of 6-12 months. If trends mean-revert within 6 months, then it is a choppy market.

    Yes, CTAs are long gamma (pay-off looks like a straddle) and they profit from high and rising volatility. The current tightrope between bearish fundamentals and breaking the sell-offs with more QE / other policy interventions has made markets choppy and has cut the tails on which CTAs depend.

    If markets remain forever successfully managed by the central planners then CTAs will have to either shorten their horizons or die. Currently there are outflows from the strategy, so this will somewhat help improve returns. Normally it is always a good time to invest in CTAs when they are in a drawdown.

  6. If rates stay low, then CTAs will still make some money (e.g. they have been profitable in JGBs so far).

    Rising rates will initially hurt them for sure. Shorting bond is normally a pain, because you still have negative carry, so it will be a pain.

    But my feeling is that when bond yields start to rise, then equities and other risk assets will probably also drop. So everybody will be in a world of hurt, not only CTAs. If the risk asset drop is prolonged, then CTAs may make money shorting them.