Should You Own Managed Futures Funds?

One question that investors should consider is what role, if any, managed futures funds should play in their portfolio. Answering this question is difficult and involves a number of different considerations.

Managed Futures Strategy Overview

For those who are not familiar with the product, managed futures represent an alternative investment strategy whereby a fund manager implements a trading strategy using futures contracts. Managed futures funds come in many different varieties with focuses on different asset classes and risk levels. Managed futures funds typically implement trading strategies based on technical indicators such as momentum across equities, fixed income, commodities, and currencies.

While each managed futures fund follows its own strategy, managed futures funds tend to focus primarily on momentum based strategies. Thus, to a large degree managed futures funds tend to be trend following funds. At a high level, the strategy attempts to participate in upside swings while avoiding downside moves.

Managed Futures Investment Vehicles Have Evolved

Historically, many of the sophisticated strategies employed by managed futures funds today were initially pioneered by hedge funds managing money for large institutional clients. While managed futures hedge funds still exist, the investment strategy has gradually become more accessible.

The first managed futures mutual fund was launched by Rydex in 2007. AQR, a leader in the space, launched its first managed futures mutual fund in 2010. While these mutual fund products were more easily accessible than hedge funds, they typically carried initial investment minimums of a few million dollars along with fairly high management fees.

More recently, managed futures funds have become even more accessible to individual investors via ETFs. Below is a list of leading managed futures ETFs currently available:

IMGP DBi Managed Futures Strategy (DBMF)

• Launched in May 2019

• Net assets of ~$950 million

• Total expense ratio of 0.85%

KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM)

• Launched in December 2020

• Net assets of ~$281 million

• Total expense ratio of 0.90%

Simplify Managed Futures Strategy ETF (CTA)

• Launched in March 2022

• Net assets of ~$155 million

• Total expense ratio of 0.78%

While these fees are high compared to most other ETFs, they are significantly lower than the fees which hedge funds and mutual funds had previously charge. For context, the AQR Managed Futures Strategy Fund currently charges a net expense ratio of 1.28%.

Historical Performance of Managed Futures Strategies

Historical performance for managed futures strategies is difficult to asses as the earliest managed futures index, the Mount Lucas Management Index did not launch until 1988. On an inception to date basis, that index has delivered an annual return of ~9.4% with volatility of ~16.6%. Comparably, over the same period, the S&P 500 has delivered an annual return of ~10.7% with volatility of ~14.7% while the Bloomberg Barclays US Aggregate has delivered a total annualized return of ~5.3% with volatility of ~4.1%. While the risk adjusted return of managed futures may not seem compelling, the picture changes when considering that the Mount Lucas Management Index has an inception to date correlation of -0.25 vs a traditional 60/40 portfolio. Based on this fact, managed futures seem like a no brainer as they allow for investors to increase returns while reducing risk. However, the recent realized performance of actual managed futures products has been less compelling.

The Guggenheim Managed Futures Strategy (RYIFX) has the longest performance history of any managed futures mutual fund as this represents the initial Rydex fund which was acquired by Guggenheim.

Since inception, RYIFX has delivered a total return of just 16.4% compared to a total return of 358.6% by the S&P 500 and 56.1% by the Barclays US Aggregate.

The inception to date performance of the AQR Managed Futures Strategy (AQMIX) is somewhat better with that fund having returned 44.9% since its launch in 2010.

While the long-term historical performance track record of managed futures mutual funds is not very strong on an absolute basis, it must be noted that these funds have exhibited a fairly low correlation to traditional asset classes such as equities and fixed income. In fact, as shown by the chart below, managed futures funds exhibited fantastic relative performance in 2022.

The reason for this is that 2022 was a year full of trending markets. Strong trends lower in equities and bonds allowed managed futures funds to capitalize.

My View

The question of whether or not an individual or institutional investor should own a managed futures fund is not an easy one to answer.

On one hand the very long-term performance history of the Mount Lucas Management Index suggests that managed futures can serve as an excellent diversifier to a traditional 60/40 portfolio.

On the other hand, the realized historical performance for managed futures products has not been very strong. Long-term holders of managed futures mutual funds have missed out on stronger performance delivered by stocks and bonds.

While the expected sharpe ratio of managed futures funds may have eroded due to an increasing number of trend following funds, managed futures products have still shown an ability to act as an important portfolio diversifier. Evidence for this can be seen by strong risk adjusted performance in 2022.

That said, it must be noted that managed futures products will not necessarily always have a negative correlation with equities and bonds. For example, consider the current market environment which has been characterized by a steady sell off in bonds. Managed futures funds have generally been positioned short the bond market for this reason. If there were to be a major risk-off move in markets due to a news event, bonds would likely surge in price immediately and thus managed futures funds may exhibit a high positive correlation to equities as they would not be able to exit their position quickly enough.

For investors mostly concerned with achieving the best possible total return with their capital, managed futures may not make sense as the performance drag vs equities can be significant over long periods of time.

For investors who are highly focused on managing risk and minimizing drawdown risk, managed futures may indeed have a small role to play in the portfolio (perhaps 5%).

Additionally, an allocation to managed futures may be more attractive if the expected return for traditional asset classes such as equities and bonds is lower. In particular, I believe managed futures can make sense in a very low interest rate environment as investors do not lose much expected return by allocating to a managed futures strategy compared to a structural long position in low yielding bonds. Moreover, the potential diversification benefit from owning bonds is lower in a low interest rate world as capital appreciation is more limited.

Today’s investment landscape is characterized by a relatively high level of interest rates. Furthermore, I believe high quality bonds are well positioned to see significant gains due to falling rates in the event of a serious economic slowdown. I am less certain that managed futures will deliver strong returns in an economic downturn due to current short exposure to government bond futures. For these reasons I do not currently favor a large position in managed futures funds.

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