You’ll be hearing more about managed futures in the coming months and years. Not just because there are many products being launched and promoted, but also because it is a long-standing and consistent alternative strategy.
Managed-futures strategies are run by a heavily regulated and monitored class of portfolio managers called commodity-trading advisors (CTAs).While often considered hedge funds, the correlation of CTA strategies to most other hedge fund types is very low (see “Correlation of alternative strategies to S&P 500).
Managed futures are one of the most accepted alternative strategies in the market today. According to Hedgeweek, they are the largest alternative investment strategy in Europe, accounting for 20% of the nearly $400 billion invested in alternative investment strategies.
The majority of managedfutures strategies are looking to follow trends in a broad range of assets, including: metals, energy, grains, soft commodities, and financials such as equity indices, interest rates and currencies. By and large, CTAs use futures contracts to get exposure to these asset classes, since futures are liquid, transparent, exchange-settled and cleared (no counterparty risk).
CTA strategies are characterized by riskmanagement and capital allocation rules, which are disciplined and often quantitatively executed. CTAs are generally looking to participate in both uptrends and downtrends that occur in the markets.
While investors often crave a fundamental reason for following a given market trend, the simple truth is CTAs are long because a market is going up; or short because a market is trending down.
This combination of systematic execution and trend participation enables managers to separate themselves from market emotion and be agnostic in terms of market opportunities. While some people think CTA strategies are black box due to the use of computerized quantitative strategies and the perceived lack of transparency, a number of advances will hopefully change this viewpoint.
Several managed futures indices now provide full transparency in terms of position and methodology. These indices are linked to ETFs and mutual funds. For the first time, Towers Watson has added managed-futures strategies to its recommended list, citing increased transparency from CTA managers, according to HFMWeek. Moreover, there is greater acceptance of computerized quantitative strategies as we rely on technology to provide consistent risk management.
Correlation of alternative strategies to S&P 500
Source: Hedge Funds and Individual Hedge Fund Strategies: Hedge Fund Research., Inc; Managed Future: International Traders Research, Inc., US Stocks: Standard and Poor’s: US Bonds: Barclays Aggregate Bond Index