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What Are Managed Futures?

BLOG, EDUCATION  |  16 Nov 2010

Even though the stock market has been doing very well as of late, many investors still have vivid memories of the stock market crashes of 2000-2002, and 2008. Many people wonder what they can do to help reduce the volatility of their portfolio. We have previously discussed using options to reduce risk, now, we turn our attention to another strategy that can provide good portfolio diversification, reduce volatility, and enhance overall portfolio returns. That strategy is Managed Futures.

What are Managed Futures? Essentially, it is a trading strategy that may involve going long or short futures contracts in areas such as:

  • Metals – Gold, silver, platinum, etc.
  • Grains – Soybeans, corn, wheat, etc.
  • Equity indexes – S & P 500, Dow Jones, etc.
  • Soft Commodities – Cotton, coffee, cocoa, sugar, etc.
  • Foreign Currencies – U.S. Dollar, Swiss Francs, etc.
  • U.S. Government Bonds – Futures on Treasury Bills

The strategy has been used successfully by large endowments such as Harvard & Yale for many years, as well as successful Hedge Funds. For smaller investors, though, it has been more difficult to access this strategy. However, that has changed over the last few years as there are mutual funds available now that offer this strategy such as the Rydex Managed Futures Strategy Fund or the Altegris Managed Futures Strategy Fund. Generally, these mutual funds will use a trend following strategy to go long or short the particular future, and to stay consistent with the index which could be either the Altegris 40 Index mentioned below, or the Standard & Poor’s Diversified Trends Indicator (DTI).

The key advantages of using Managed Futures as a portfolio diversifier are:

  • The very low correlation to stocks and bonds.
  • The ability to profit in any kind of market environment.
  • Can enhance returns and reduce overall portfolio volatility.
  • Generally, have produced consistent long-term returns (see below).

Some disadvantages:

  • The strategy in a mutual fund will have a higher expense ratio than most traditional mutual funds.
  • Not really the most tax efficient strategy so is generally better utilized in tax advantaged accounts such as an IRA.

The information below is obtained from the Altegris website and gives a general view of how an index of Managed Futures has performed the last 10 years versus US Stocks.

Performance Statistics: Managed Futures vs. US Stocks

July 2000 – June 2010

  Managed Futures US Stocks
Annualized Return 8.01% -1.59%
Annualized Standard Deviation 11.22% 16.09%
Correlation to US Stocks -0.18 n/a
Sharpe Ratio (Rf=2.5%) 0.49 -0.25
Worst Drawdown -13.24% -50.95%
Date of Worst Drawdown 02/04-08/04 10/07-02/09

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. Managed Futures represented by Altegris 40 Index; US Stocks represented by S&P 500 TR Index. Source: International Traders Research (ITR). The referenced indices are shown for general market comparisons and are not meant to represent the Fund. The Fund is new and has no performance history.

So, even though the Managed Futures Strategy has been around for 30+ years, it is a more recent addition in mutual funds. The long term results have been very good, and the benefit of reducing the volatility and increasing the diversification in your portfolio make them worth a look.