Portfolios that include managed futures funds perform better and reduce more risk than those without them, according to research published by the Alternative Investment Management Association (AIMA), the global representative of alternative investment managers, and Societe Generale.
The paper, which is about commodity trading advisers (CTAs) and managed futures funds and titled ‘Riding the Wave’, explains the roles that managed futures funds typically play in investor portfolios and the diverse strategies on offer. The paper also highlights the considerations investors should adopt when investing.
AIMA and Societe Generale analysed the risk and return profiles of investment portfolios including and excluding managed futures funds from 2000-2016. For example, the performance of a traditional asset mix of 60 percent bonds and 40 percent equities is enhanced with the addition of CTA strategies, which may increase the return and risk-adjusted returns (by lowering the volatility), as well as considerably lowering and shortening drawdowns.
The paper also found that the largest drawdown – or peak-to-trough decline - for managed futures funds since 2000 was less than a quarter of the scale of the largest drawdown for global equities (-11.63 percent versus -53.65 percent). Large drawdowns not only destroy asset values but can take investors years to recover from.
Particularly noteworthy was the sector’s collective performance at the height of the global financial crisis. All CTAs in the Societe Generale managed futures database reported positive returns in 2008 and many were up by more than 30 percent for the year.
The research is published at a time of rising investor interest in managed futures funds. The sector has grown nine-fold since 2000, reaching $340 billion in assets under management at the end of 2016. Most recently, managed futures funds recorded a $10.4 billion net inflow in Q2 2017 – the largest inflow of any hedge fund strategy.
The paper said this continued investor interest is due to the sector’s liquid and transparent nature and the potential for uncorrelated returns. The most common trading strategy across the managed futures sector is trend-following – buying into rising markets and shorting falling markets – and now accounts for approximately half of the sector’s assets under management.
AIMA’s CEO Jack Inglis said: "Our latest educational paper will help investors better understand managed futures and will go some way to dispel the idea they are black boxes that can’t be understood. It provides insight into the criteria that need to be considered when investing in managed futures, especially as the number of strategies, exchanges and execution techniques mean no two are the same. Increased inflows show that managed futures have a role to play when providing downside protection and we hope this paper will help investors when considering how to balance their portfolio."
Societe Generale Prime Services’ Tom Wrobel, a member of the Alternative Investment Consulting team, said: "The continued inflows into CTAs mean they are becoming a more ‘mainstream’ strategy on the radar of institutional investors. Being part of this AIMA analysis has been important for us to shed light on the evolving managed futures industry with our clients, especially those exploring it for the first time. At Societe Generale Prime Services, we monitor trends in the CTA space, and calculate a set of indices and indicators, to provide analysis and track the performance of the CTA industry. As performance has been mixed this year, consolidating all of these findings makes it easier to follow and understand the CTA space for those interested in exploring it as a strategy."
Alternative Investment Management Association, Societe Generale, Funds, Cayman Islands, London