Better future for managed futures?
If any financial planners or clients needed proof that managed futures funds don’t march in lockstep with the stock market, they needn’t go back more than six years.
Managed futures funds, which can go long or short futures and other contracts in areas such as commodities, equities, currencies, and interest rates were up in 2008, says Matt Osborne, managing director of Altegris Advisors, an alternative-investment firm in La Jolla, California. “Since then, the results of broad managed futures indexes generally have been negative, especially in 2011 through 2013.”
Some critics argue that though managed futures are uncorrelated, they represent a zero sum game before costs, making expected returns negative after costs. According to Morningstar, the five year returns averaged -2.47% annually. Meanwhile, equities markets, in contrast, plunged in 2008 but have climbed to peak levels in the past five years.
The recent slump in managed futures, according to Osborne, results largely from coordinated central bank intervention. “The effort to stimulate major economies has dampened volatility,” he says. “Managed futures funds rely on trends, up or down. Other than going long in equities, we haven’t seen many sustained trends recently.”
'SKY ISN’T FALLING'
Rob Sinnott, a portfolio manager at the Natixis ASG Managed Futures Strategy Fund, points to low short-term interest rates as another cause of depressed performance in the category. “Managed futures funds typically hold short-term cash and rely on the interest earned for part of their return,” he says. “If short-term interest rates had been higher, recent results would have been closer to historic norms. The sky isn’t falling for managed futures.”
Indeed, Osborne points to “rays of hope” for managed futures in the near future. “Fed tapering is on track,” he says, referring to the Federal Reserve’s reduction in its asset purchases. “U.S. interest rates could rise in 2015. Meanwhile, Japan is still easing and Europe has adopted negative interest rates.” This end to international coordination could create dislocations, Osborne believes, and opportunities for trend-following managed futures funds.
Sinnott says that short-term interest rates are expected to move higher while central banks appear to have reduced hindrance to ongoing trends, citing the Bank of Japan’s support for devaluing the yen. “What’s more,” he adds, “central bank actions don’t matter very much to commodities such as wheat or cattle, which can offer trends for managed futures funds.”
Managed futures have proven to be uncorrelated to traditional asset classes, Osborne asserts.
“There’s an argument for keeping a constant 5%-10% portfolio allocation to managed futures,” he says, “in the hope that they’ll produce positive results when they’re most needed.”
As is the case with hedge funds, some managed futures funds are limited to suitable investors, with high required minimum investments and limited liquidity; recently, managed futures mutual funds have been introduced, with easier access and liquidity. Investors can choose single manager or multi-manager funds.
“We think multi-manager funds work better in managed futures,” says Osborne. “There’s a wide dispersion of results in managed futures, more so than in many other asset classes. With a variety of managers and strategies, investors have a better chance of approaching the industry average.” Sinnott’s fund is in the single-manager category; he says that fees for single-manager funds may be lower and that control may be greater, avoiding over-concentration in specific positions.
To choose among available offerings advisors should check into the managers’ background—how well they did in previous crises—and look closely at the fee structure. Sinnott suggests that advisors check to see whether a given managed futures fund allows managers to have discretion over trades or whether it’s purely systematic, with algorithms designed to track multiple asset classes.
Osborne notes that advisors and investors might be discouraged after what’s happened recently. However, patience may pay off for those who stay invested. “Historically,” he says, “gains from managed futures have come in short fast bursts.” These funds could be the right place, when the right time comes again.