The Optimal Allocation to Managed Futures

Last Fall, we geeked out on the question that we get asked the most by investors and clients alike, “How much of my portfolio allocation should be dedicated to Managed Futures?” We looked for answers by building two different tables based on an investor’s return expectations for alternatives and based on how much alternatives would help decrease the magnitude of a drawdown.

Another way the investing world finds the optimal allocation to Alternatives is using the Efficient Frontier from Modern Portfolio Theory.  This isn’t Jean-Luc Picard and the Final Frontier – this is the Efficient Frontier where one can calculate the best possible mix of portfolio components to arrive at the highest possible return with the lowest possible risk (as measured by volatility). In plotting all of the different returns and risks of differing portfolio allocation amounts, from 0% in alternatives to 50% all the way up to 100%, you get a curve of the returns and risk of each possible portfolio. The point on that curve with the highest return and lowest risk is the most efficient allocation of assets, known as the Efficient Frontier (see our previous articles on it, here and here).

Then and Now

Back in 2008, the CME Group published their look at the efficient frontier, finding a 20% allocation to Managed Futures and a 40% allocation each to stocks and bonds as the most efficient portfolio allocation splits.

CME Efficient Frontier

(Disclaimer: Past performance is not necessarily indicative of future results)

But, news flash, asset class returns aren’t stagnant – they go up and down, in and out of favor, and so forth. Meaning the curve after the financial crisis is likely to be different than the one before it. We’ve updated the efficient frontier every year since, to give investors the most recent look, with managed futures having moved from the 20% level to 40%  after the financial crisis, and now down around 35%. Here’s the efficient frontier using data through the end of 2015:

Efficient Frontier 2015(Disclaimer: Past performance is not necessarily indicative of future results)
Stocks = S&P 500, Bonds = Citi World Bond Index,
Managed Futures = DJCS Managed Futures Index

Now, perhaps more telling than the snapshot as of December, is the best allocation percentage according to the efficient frontier each year going back most of a decade. You’ll see this is a moving target, to be sure, but consider the crazy times we’ve lived through these past 8 years – and the varying fortunes of stocks, bonds, and alternatives (as represented by managed futures). It hasn’t been easy for any of them with the financial crisis, massive bull run in stocks, and 3 year period when systematic trend following strategies struggled; but even so, the optimal allocation has remained relatively stable in the 30% range.

Optimal Allocation to Managed Futures

(Disclaimer: Past performance is not necessarily indicative of future results)
Portfolio Makeup 2010-2012: 36% Stocks (S&P 500), 24% Bonds (Citi World Bond Index), 40% Managed Futures (DJCS Managed Futures Index)
Portfolio Makeup 2013-2015: 38% to Stocks, 27% to Bonds, and 35% Managed Futures
Performance begins as in 1994.

Finally, as we’ve pointed out before, you don’t invest in an index, you pick out actual Managed Futures managers, meaning the numbers would surely shift to different portfolio allocations based on that manager’s distinct return profile.  Let us know if you’d like an efficient frontier run on a manager you’re interested in. We’re building a new “Allocator” tool into our new website which will allow you to see how an allocation to a certain manager will change the returns and risk of your overall  portfolio, and can use the tech to run a report for you if interested. After all, that’s what we do.

2 comments

  1. […] How much should you invest in managed futures? (managed-futures-blog.attaincapital) […]

  2. […] Myth Busting: Stock Buybacks aren’t Propping up the Stock Market | Pragmatic Capitalism The Optimal Allocation to Managed Futures | RCM’s Attain Alternatives Blog Beware bad multi-factor products | NEWFOUND RESEARCH BLOG – Flirting with Models™ […]

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, RCM's own estimates of performance based on account managed by advisors on its books, 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, RCM's own estimates of performance based on account managed by advisors on its books, 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.