Improving the Odds With Managed Futures

8/11/2019 Improving the Odds With Managed Futures

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DIANE HARRISON

Improving the Odds with Managed Futures

PANEGYRIC MARKETING| MARCH 2014


With uncertainty dominating world news and subsequent market reactions, investors crave any means available to help them

mitigate portfolio investment risk. The use of alternatives has long been accepted by sophisticated investors as a proven way to

help reduce overall portfolio risk over market cycles. Managed futures have always been central to this option, particularly when

sharp volatility spikes drag traditional market classes down together.

Yet the asset class remains somewhat of a mystery to many investors. They question how managed futures can provide a port in

the storm during choppy markets. They have been led to be skeptics based on a general tendency of the media to focus its

coverage on trend follower’s downside performance during the fiscal intervention years of recent past, and to exhibit a lack of

emphasis on the benefits managed futures offer to investors through diversification and non correlation. To achieve the benefits

of managed futures, investors need to minimize the risks and do everything they can to improve their chances for success

during difficult market conditions. Let’s take a look at some of the basic benefits that this strategy provides in dampening the

pain investors are all too familiar with these days.

Managed futures have low correlation to stocks and bonds mainly due to equal facility in up or down market cycles

Able to achieve absolute returns: Commodity Trading Advisors (“CTAs”), the professionals who trade managed futures, are

comfortable trading both long and short markets, increasing the potential to profit from market moves in either direction

and creating potential for absolute returns. CTAs can deliver absolute returns by buying futures positions in anticipation of a

rising market or selling futures positions if they anticipate a falling market. They can also employ options strategies with

futures contracts that allow for profit potential in flat or neutral markets.

Able to profit from rising or falling markets: Commodities markets often respond more strongly to supply and demand

factors as primary drivers rather than macro factors such as a strong economy, credit conditions, or corporate profits. CTAs

are also trading in highly liquid, well-regulated, exchange-traded instruments and foreign exchange markets, which allows

for the portfolio to be “marked-to-market” daily. And unlike long-only commodity indices and commodity ETFs, which rely on

the price of commodities rising, managed futures programs actively trade both sides of commodity price movements,

allowing them to potentially perform whether commodity markets go up or down.

Able to offer protective stance during prolonged or severe market declines: History shows that managed futures are often

one of the best performing assets during bear markets and financial crises. The chart that follows illustrates both the non



DIANE HARRISON



correlation and outperformance characteristics of managed futures during the past 25 years during the five largest market

draw downs.

Managed futures offers p rticip tion cross m rket c tegories nd in the world’s l rgest nd most liquid m rkets

Market Diversification: Most managers trade across dozens or even hundreds of individual futures contracts to increase

diversification. Due in part to its deep market penetration, the growth of managed futures has risen dramatically over the

past decade:



DIANE HARRISON



Dynamic asset allocation: Most CTAs allocate dynamically across multiple asset classes – equities, commodities, fixed income

and currencies – aiming to deploy capital where they perceive the strongest opportunity. The table below shows a

representative sampling of some of the markets CTAs participate in:

Rising Interest Rates: Managed futures are one of the few strategies that can produce positive returns in both rising and

falling interest rate environments. Investing in managed futures that include commodities and foreign currency participation

can offset a portfolio’s losses produced in equities and bonds when inflationary pressures impact stocks and bonds

resulting in underperformance. With 2014 likely to be a pivotal year for the direction of interest rates, managed futures

should be a key focus for consideration in portfolio management.

Managed futures offer a variety of strategies in which to participate in the global markets

In addition to the deep market penetration, highly liquid and well-regulated markets, and the ability to profit in rising and falling

markets that CTAs can take advantage of in managed futures, there are additional ways for investors to diversify among the

trading advisors who offer managed futures strategies. Several of the most popular include:

trend following

short-term trading

sector specialists

discretionary and global macro.

NO TES BONDS

Aussie 10yr Bond

Aussie 3yr Bond

Canadian 10yr Bond

German 5yr Bun d

German 10yr Bund

German 2yr Schatz

Japanese 10yr Bond

UK Long Gilt

US 10yr Note

US 2yr Note

US 5yr Note

US T-Bond

CURRENCIES

Australian Dollar

Brazilian Real

British Pound

Canadian Dollar

Euro FX

Japanese Yen

Mexican Peso

New Zealand Dollar

South African Rand

Swiss Franc

US Dollar Index

ST OCK INDICES

Australia SPI 200

Canada S&P 60

China (HK) Hang

Seng

EuroStoxx50

France CAC 40

Germany DAX Index

Japan Nikkei 225

Japan Topix

Singapore MSCI

S. Africa JSE Top 40

Sweden OMX

Taiwan MSCI

UK FTSE 100

US DJIA

US NASDAQ

US Russell 2000

US S&P 500

US S&P MidCap400

RATE BILLS

Aussie Bank Bill

Can. Bank Accept.

Euribor

Eurodollars

Euroswiss

Euroyen

UK Short Sterling

RATE BILLS

Aussie Bank Bill

Can. Bank Accept.

Euribor

Eurodollars

Euroswiss

Euroyen

UK Short Sterling

PR ECIOUS METALS

Gold

Silver

Platinum

Palladium

IN DUSTRIAL METALS

Aluminum

Copper

Lead

Nickel

Tin

Zinc

GRAINS

Corn

Milling Wheat

Rapeseed

Rough Rice

Soybean Meal

Soybean Oil

Soybeans

Wheat

SOFTS

Cocoa

Sugar

Coffee

Orange Juice

LIVESTOCK MEATS

Feeder Cattle

Live Cattle

Lean Hogs

FIBERS

Cotton



DIANE HARRISON



Trend following Managers in this category use quantitative systems and models to identify trends in financial and commodity

markets. Most trend-following managers trade in over 30 different futures markets in all asset classes: equities, commodities

currencies, and fixed income. Trend followers historically have done well when stocks are down. In good times for managed

futures overall, trend followers are often one of the best performing strategy groups. However, trend followers may experience

large or sustained draw downs, and they typically have a relatively high correlation to one another.

Short-term trading : In the short-term, markets often experience less trend behavior and more mean-reversion. Also, market

segmentation across time zones, with markets opening and closing across the globe at different times, can lead to a rich set of

opportunities in addition to trend. Short-term managers tend to trade in ten or more of the most liquid financial futures

markets: equities, currencies, and fixed income. Most short-term CTAs employ counter-trend and mean reversion trading, with

holding periods from inter-day to two weeks in duration. These CTAs historically have exhibited low draw downs and volatility

with demonstrated low correlation to other managers and strategies in managed futures.

Sector specialists: These managers offer focused participation with fundamental input in key markets or sectors (e.g. FX, fixed

income, energy, stock indices, metals, etc.). They often show low correlation to other managers and strategies, potentially

providing excellent diversification benefits.

Discretionary and global macro: Often considered the broadest category of CTAs outside of trend followers, these managers

analyze global factors and themes that are affecting the markets to formulate their strategy approach. They are well diversified

across asset classes, conceptual investing themes, and trading time-horizons. They may offer superior return potential and

attractive risk-adjusted returns. Managers typically rely on fundamental inputs which can be combined with technical analysis in

this strategy. Discretionary and global macro CTAs traditionally exhibit low correlation to other CTAs as well.

Managed futures can assist in taming the volatility that increasingly impacts the world markets

Utilizing managed futures, particularly in a thoughtful and balanced way with a portfolio focusing on the three managed futures

strategy groups that have a low correlation to trend following and to each other, can help investors improve their overall portfolio

performance. Including managed futures within a portfolio can offer investors consistent returns, help to manage volatility

potentially constrain draw downs, and complement allocations to other assets. It’s an asset class well worth devoting time to

understanding today and for the long term.

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and

specializing in a wide range of writin g services within the alternative assets sector. She has over 20 years’ of expertise in hedge fund

marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. In 2014, the firm was awarded IHFA’s

Innovative Marketing Firm of the Year for the second year in a row. In 2013, the firm was awarded IHFA’s Innovative Marketing Firm of the

Year, and AI’s Marketing Communications Firm of the Year - US. A published author and speaker, Ms. Harrison’s work has appeared in many

industry publications, both in print and on- line. Contact: [email protected] or visit www.panegyricmarketing.com.

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Improving the Odds With Managed Futures

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