This Easy Table will Help you Understand Correlation

The reputation around the alternative space is that Managed Futures is an asset class you need for diversification when the stock market goes into crisis. After all, it was one of the only investment strategies out there that not only showed a positive return, but showed double digit returns (Newedge CTA Index) during the 2007/2008 financial crisis.

But that type of thinking about diversification leads to a dangerous mindset, where investors see Managed Futures as negatively correlated to US stocks (going up while stocks go down, and down while stocks go up). We don’t have a problem with the first part of that, managed futures going up while stocks go down… but the other part isn’t always true. Managed Futures aren’t always down when stock go up.

Statistically – this is because they are NON-correlated versus negative correlated. What’s that mean?  It means that managed futures goes up and down independently of the stock market, at times doing the same thing, at times doing the opposite – to average out as doing something different, and tending to do the exact opposite when there’s a violent or prolonged move down, because that tends to cause a sell off across various markets from Crude Oil to Aussie Dollars.

So, if investors are aware of the managed futures profile during down markets – how familiar are they with the profile during up markets (beyond the small sample size that is the past 4 years), and moderately up markets, and sideways markets?  In our recently updated, “Managed Futures: Performance Profile,” we broke down stock market performance based on 12 month rolling rates of return of the S&P 500 going from 1994-2014, and then created different “buckets” of performance representing seven different market environments – ranging from the very good (rolling 12 month returns of over 30%) to the very bad (rolling 12 month returns of -25% or lower). From there, we simply looked at the rolling 12 month rates of return for managed futures on those dates which fell into each “bucket,” and averaged across all such dates. And because we’re overachievers, we analyzed world stocks, bond, and hedge fund performance in the same manner.

Stock_market_cyclesDisclaimer: Past performance is not necessarily indicative of future results)
Data Span = 1994-2014

Our takeaway from the Whitepaper:

There are a few important takeaways here. For starters, the other so called diversifiers out there-hedge funds and world stocks- aren’t exactly the diversifiers you think. World Stocks, on average, lost more than the S&P 500 during down periods, and, in most instances, underperformed during the good times. Hedge funds posted positive returns on average during the down periods, but when the down periods were really down, the numbers weren’t exactly impressive. For those looking to diversify based on market cycle performance, these may not be the magic bullets you were hoping for.

Managed futures, on the other hand, on average, posted positive returns in each of those stock market cycles- the only asset class outside of bonds to do so. For those into such cycle period performance, the takeaway equation should be:

Managed Futures = Good when stocks are bad + OK when stocks are good.

To learn more about Managed Futures performance, its track record with consistency, and our rankings, download our “Managed Futures Performance Profile.”

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.