An Advisor’s Guide to Demystifying Managed Futures

In an environment of pronounced volatility and less-than-certain equity and bond performance in the last few years, investors are leaning toward more complex strategies such as alternatives. Managed futures are one such strategy, equally complex and alluring for the strong diversification they can bring to portfolios.

It’s been a tumultuous start to the decade as global markets and economies contend with pandemic, geopolitical risk, recession, inflation, and more. Last year when both equities and bonds sank, many managed futures funds soared. But why?

The Benefits of Futures

Alternatives come in many shapes and sizes, from private equity to hedge fund strategies and more. Managed futures fall into the second category as a strategy long relegated solely to hedge funds and only fairly recently made available via the ETF wrapper.

The strategy entails investing in futures contracts and the hedge fund managers of these strategies are referred to as Commodity Trading Advisors (CTAs). Futures are a derivative contract whereby assets are bought and sold at an agreed price at a specific point in the future. They trade on specific futures exchanges such as the CME and are generally fairly liquid.

Futures are often used to speculate on prices. They’re also used to hedge against future prices of any number of asset classes. Managed futures strategies invest across several asset classes, including bonds, equities, commodities, currencies, and more. They use a propriety system to do so that is at the discretion of the manager.

These strategies take long and short positions on asset classes via the futures market. Because they are trading in futures, they carry low to negative correlations to stocks and bonds.

Managed Futures: The Ultimate Trend Following Strategy

While these types of strategies come in a variety of flavors, the most prominent remains the trend-following strategy. This approach entails using technical indicators to determine a long or short position in an asset class via futures. It’s a strategy that invests in how asset classes are actually moving, compared to forward-looking estimates of future performance.

Because these strategies are actively managed and based on technical indicators, they capitalize on market dislocations faster than more traditional investment strategies. It’s what earned them the nickname as the “crisis alpha” generators. As an asset gains, managed futures can take long positions via futures. Conversely, and most importantly, when asset prices fall, these strategies can take short positions via futures and capitalize on the losses.

The funds available to investors through ETFs use a variety of methodologies for approaching futures investing. Understanding what is under the hood of these complex funds is vital. Different methodologies often lead to drastically different fund performance.

Funds like the KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM) do not carry exposures to equities whatsoever. The Simplify Managed Futures Strategy ETF (CTA) does not carry exposure to equities or currencies. Meanwhile the WisdomTree Managed Futures Strategy Fund (WTMF) includes exposure to treasuries via an ETF, the WisdomTree Floating Rate Treasury Fund (USFR).

The iMGP DBi Managed Futures Strategy ETF (DBMF) utilizes a proprietary, quantitative model for replication of the average performance of the 20 largest managed futures hedge funds. The fund analyzes the trailing 60-day performance to determine a portfolio of liquid contracts that mimic the performance (not the positions).

For more news, information, and analysis, visit the Managed Futures Channel.

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