Managed Futures Correlation

We talked last week about AIMA’s research on what a Managed Futures can do for your portfolio. But the paper is full of other interesting data and charts that we didn’t get to cover our first time round, detailing unique aspects of Managed Futures as it relates to correlations.

We won’t blame you if correlation statistics are a little hard to wrap your head around.  It’s easy to understand positive correlation (performance moves together) and negative correlation (performance moves in opposite directions), but non-correlation is a bit harder to grasp. Just what does a -0.06 correlation look like, anyway. How do we conceptualize a lack of correlation one way or the other? Most of us incorrectly conflate negative correlation with noncorrelation, but the reality is that non-correlations really just means sometimes positively correlated, sometimes negatively correlated. Here’s an explanation and graphic from the AIMA paper:

The shaded areas demonstrate times (throughout the 17-year period) where global equity returns over the past 12 months were negative. The relationship between CTAs and equities is not static, with the correlation varying from positive to negative through time. Further, CTA trend-followers have been negatively correlated to equity markets over the course of four equity market corrections since 2000. In other words, when equity markets have been falling in value, typically these trend following managed futures strategies have been behaving in an opposite fashion i.e. with the potential to produce positive returns.

There are two takeaways here: 1) Managed Futures was negatively correlated to world stocks (going up while they were going down) when world stocks were experiencing a crisis in performance. And 2) the correlation spans a range as low as -0.8 and as high as 0.8 – showing what a non-correlation really looks like. We would almost expect it to be oscillating around the zero line with the correlation over the whole period just -0.06, but you can see the rolling correlation line spends nearly no time around that level… instead venturing an order of magnitude above and below it.

Smile 🙂

Looking closely at the data above, but in a slightly different way, should surely make you smile. You see, when the correlations are the strongest, it also happened to be when performance in those markets was the most extreme (up and down). Said another way, Managed Futures performance in relation to world stocks is flat when world stocks are flat, and big on the ends… like a smile.  AIMA has just the chart to show the heaviness of the performance tied to a stronger correlation, what some people call a performance smile. Here’s the AIMA:

To be precise, they have shown an increased ability to generate positive returns when a traditional financial market portfolio is either falling or rising, i.e. moving in a clear direction. Figure 6 indicates the historical positive correlation to a diversified portfolio of +0.2 when it is increasing and a negative correlation of -0.2 when it is decreasing. A trend line has been added to the graph to demonstrate the reason behind the name for the return profile of managed futures, which resembles a smile.

Volatility Smile Managed Futures

Correlation to All Investments

Chances are, World Stocks and Managed Futures aren’t the only asset classes that make up your portfolio. So what asset classes out there have the lowest correlation to each other? AIMA – again – has this chart – looking at the ten-year correlation of ten different asset classes, and Managed Futures is right in the sweet spot.

Managed Futures 10 Year Correlation to 10 Asset Classes

There you have it. All this is to say that the reason Managed Futures offers almost the same return with less risk, is because those return drivers are dynamic – at times aligning themselves with stocks, hedge funds, and the like; but other times zigging when they zag – to create a long-term noncorrelation out of short-term positive and negative correlations.



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.

The programs listed here are a sub-set of the full list of programs able to be accessed by subscribing to the database and reflect programs we currently work with and/or are more familiar with.

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. Individuals cannot invest in the index itself, and actual rates of return may be significantly different and more volatile than those of the index.

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.

Limitations on RCM Quintile + Star Rankings

The Quintile Rankings and RCM Star Rankings shown here are provided for informational purposes only. RCM does not guarantee the accuracy, timeliness or completeness of this information. The ranking methodology is proprietary and the results have not been audited or verified by an independent third party. Some CTAs may employ trading programs or strategies that are riskier than others. CTAs may manage customer accounts differently than their model results shown or make different trades in actual customer accounts versus their own accounts. Different CTAs are subject to different market conditions and risks that can significantly impact actual results. RCM and its affiliates receive compensation from some of the rated CTAs. Investors should perform their own due diligence before investing with any CTA. This ranking information should not be the sole basis for any investment decision.

See the full terms of use and risk disclaimer here.