Family offices
Managed futures investors profited handsomely during the last decade as they saw their investments offset severe losses in the stock market. The bursting of the tech stock bubble in 2000-02 and the financial crisis of 2008 sent the S&P 500 down 46% and 52%, respectively. However, those were some of the best periods for managed futures, as the BTOP50 Index gained 39.5% during the tech stock decline and 17.25% during the 2008 market drop.
“Over the years managed futures have done what they were intended to do — increase overall portfolio return while reducing volatility,” says Todd Whitenack, Director of Investment Management at BBR Partners, a multi-family office investment advisor. “Managed futures performed well during periods other core strategies in the absolute-return hedge group did not. The day-to-day or month-to-month correlations might not be as meaningful, but during the periods of extreme stress, managed futures have historically performed very well.”
Family offices were not early adopters of managed futures, compared to large institutions and funds of funds. But the returns of the past decade have convinced many family offices to incorporate managed futures in their portfolios, according to Whitenack. “The differences [among family office portfolios] are more at an asset-class level,” he says. “We think of managed futures as part of the absolute-return hedge fund class, so it’s more a function of whether or not they have exposure to that group.”
Also included in the firm’s allocation to alternative investments are long/short equity managers, private equity, and real estate. The total allocation to alternatives across all clients is roughly one-third of the total investment portfolio, with the remainder equally divided between traditional long-only equities and fixed income.
A typical BBR managed futures allocation uses a core group of six trend-following commodity trading advisors (CTAs) which are complemented by five discretionary and systematic global macro managers. In addition to historical returns, Whitenack stresses that other important factors in building a managed futures portfolio include having exposure to a mix of time frames and markets. “You want a blend of time frames, whether it’s within managers or across managers,” he explains. “We’re biased toward managers who trade a broad array of markets so there’s not too much exposure to any one given area.”
Whitenack also looks for CTAs with active research departments and says investors should look at how a CTA’s trading program has evolved over time. “CTAs who don’t have good research departments can’t innovate,” he explains. “Over time their systems tend to get stale and work less effectively.”
Investors are most reluctant to invest in managed futures when they don’t understand systematic trading, according to Whitenack. “While it might be easier to understand a discretionary macro investing approach, investors should get greater comfort in how systematic traders are able to capture the key four or five big trends that typically develop per year,” he says.
In fact, Whitenack says the firm judges macro managers by the robustness of their processes — and often these processes are systematic in nature. “Even though the discretionary guys are discretionary, we look for a robust decision-making structure that is almost CTA-like,” he says. “So people who exclude managed futures but are interested in macro hedge funds really should be willing to look at both.”
