Riding the Wave of Managed Futures

We’re big fans of research on Managed Futures around here. That’s why we write about it so much. So when we see the Alternative Investment Management Association releases a whitepaper specifically about the ins and outs of Managed Futures, we dove right in.

The paper covers all the major points: Definitions of a CTA (Commodity Trading Advisor), How Managed Futures programs trade, the Managed Futures Industry size, the differences between systematic and discretionary, performance, and the diversity of programs in the space.

Two sections we found particularly interesting as one of the top introducing brokers in the space was the importance of manager selection and what a Managed Futures investment can do for your portfolio. First, on the importance of manager selection. Take one look at our Managed Futures database full of performance stats on hundreds of different managed futures programs, and you’ll quickly see there a whole lot of unique strategies doing more than just the vanilla trend-following managed futures has historically been known for. The AIMA says investors are now more aware of this and want to know not just that it can offset stock plunges, but they want to know where the returns come from.

They now like to know what it is that is driving the returns of a managed futures strategy as they seek to construct their portfolio with the same rigour that CTAs adopt when constructing their own. Therefore, when it comes to deciding which, if any, CTA to add to a portfolio, there is no single question to ask. There is no simple approach, and it usually involves a combination of factors. Some investors focus entirely on the quantitative aspects of the CTA and these cannot be ignored.

Equally important, however, are the qualitative aspects of an investor’s due diligence such as an understanding of the managed futures strategy and the operational structures that the CTA has in place.

Next, what a Managed Futures investment can do for your portfolio. A group like the AIMA which represents a broad swatch of the futures ecosystem (see all the players in this cool infographic) can’t really pick one or two of the best-managed futures managers to show how the asset class performs. For one, that would be cherry picking, and second, they would get some grumblings from those that weren’t highlighted. So, they do the tried and true method of viewing managed futures through the lens of the SG CTA index, looking at just how managed futures can a be good addition for returns AND risk.

Hypothetically, and based on the information provided in the table above, the optimal allocation16 to managed futures within the 60/40 portfolio (above) is 40% of the newly created portfolio. In other words, a 40% allocation to managed futures (as per above this would be achieved by reweighting the portfolio split [60% x 60% equities = 36% equities + 60% x 40% Fixed Income = 24% Fixed Income + 40% managed futures] provides the best return (as denoted by the annualised return) at the lowest risk (as a measure of the strategy’s volatility, maximum drawdown, and duration drawdown). In this case, the risk-adjusted return has gone from an initial result of 0.42 to 0.68, an increase of 62%.

Managed Futures Diversification
Please see AIMA’s explanation for allocation:

From the table, we can observe this by looking at the risk-adjusted return of the 60/40 portfolio of 0.42. Through diversification of this portfolio and re-weighting the split so that we can allocate 20% to managed futures ([i.e. 80% X 60% equities = 48% equities + 80% x 40% Fixed Income = 32% Fixed Income + 20% Managed futures] , the risk-adjusted returns increases to 0.55 – an increase of nearly one third on the initial risk-adjusted return which was produced without managed futures.

The portfolio with a 40% allocation to Managed Futures has the lowest volatility, is a point away from the highest return, with the lowest drawdown (length and depth), and highest risk adjusted return! It sounds too good to be true! And for the most part it kinda is, simply because there are very few institutional managers that would allocate 40% of their money to Managed Futures – see our explanation of that here. But whether institutions are getting the full benefit or not, the argument remains a solid one. Add managed futures for improved risk-adjusted returns {Disclaimer: Past performance is not necessarily indicative of future results}.



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.

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