Managed Futures Story. The Past as Prologue?

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Managed Futures Story

The Fundamental Things Apply.

Buy low, sell high −the Golden Rule of investing. Inexperienced investors do the opposite, selling out of a position after it’s had negative returns, often with damaging results to their long-term portfolios. Long-term investors understand that disciplined asset allocation with periodic, systematic rebalancing, may offer a way to avoid falling on the wrong side of the Rule.

Yet, as liquid alternative investments have become more accessible to investors in recent years, those new to these asset classes and strategies may have a tendency to forget that the fundamentals of investing still apply. Indeed, the purpose of allocating to alternatives is long-term, risk management through further diversification away from traditional asset classes. That’s how they’re different. Their similarities arise in how investors should manage them within their portfolios.

Tomato, Tomahto.  Large Caps, Managed Futures.

Managed futures have historically exhibited low correlation1 to traditional investments and have the ability to perform in various market conditions. And as with all asset classes, they experience periods of drawdowns2.

If you believe in modern portfolio theory and asset allocation, you know that a disciplined investor periodically buys into underperforming asset classes, and sells out of those that over perform.  It’s unheard of for any serious investor to sell out of Large Cap stocks because of a period of low returns. So why would an investor consider selling any other asset class position after such a period?

Is Past Prologue?

Interestingly enough, managed futures have often delivered some of their strongest performance following drawdown periods. In addition, the drawdowns were relatively mild compared to what many investors have become used to during downturns in the stock market.

To illustrate this point, take a look at the chart below. It shows all of the drawdowns of more than -5% from January 1980 to June 2012 for the Barclay CTA Index and the subsequent performance during the following 12 months of recovery.

[Click on the chart below to view fullscreen]

Source: BarclayHedge. Past performance does not guarantee future results. Index returns are historical and are not representative of any fund performance. One cannot invest directly in an index.

As you can see, in all but one instance, the Barclay CTA Index* ultimately provided positive performance after a -5% or larger drawdown period. Of particular note:

  • In 84% of the 12-month recoveries, the subsequent rebound in performance outpaced their drawdowns
  • Some of the largest drawdowns provided some of the strongest subsequent recoveries
  • Only four out of twenty five drawdowns were greater than -10%
Drawdown Range Number of Drawdowns Periods Average 12-Month Recovery
-6% to -10% 21 16.36%
-11% to -15% 4 35.39%

Source: BarclayHedge. Past performance does not guarantee future results. Index returns are historical and are not representative of any fund performance. One cannot invest directly in an index.

Keep Your Head

Managed futures have historically proven diversification benefits, and their potential to provide long-term performance to suitable investors is compelling.  And as with any asset class, managed futures investors should be prepared to weather drawdowns in order to take advantage of the potential long-term benefits.

If you’re an advisor speaking to your clients, or an investor considering your own portfolio, remember, in the words of Rudyard Kipling — If you can keep your head when all about you are losing theirs and blaming it on you; …Yours is the Earth and everything that’s in it…


1 Correlation – A statistical measure of how two securities move in relation to each other and ranges between -1 and +1. A correlation of +1 indicates the two returns move perfectly together, 0 indicates movements are random, and -1 indicates opposite movements.

2 Drawdown – The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.

*The Barclay CTA Index is a leading industry benchmark of representative performance of commodity trading advisors. There are currently 602 programs included in the calculation of the Barclay CTA Index for the year 2012, which is unweighted and rebalanced at the beginning of each year.

Diversification does not ensure profit or protect against loss.