Managed Futures Today Magazine

Managed futures have experienced explosive growth in the last two decades, increasing to $247 billion under management from only $11 billion in 1990. The primary driver of growth has been investor recognition of managed futures portfolio diversification value and its non-correlation to traditional asset categories such as stocks and bonds (for more details see “30 years of managed futures” from the May 2010 issue of Managed Futures Today).

“If you look at the last decade, managed futures have outperformed equities by a long shot — managed futures up 126% while equities were flat to slightly up,” says Jon Sundt, president and CEO of Altegris Investors. “During that time period, managed futures have had a lower drawdown, lower standard deviation, and very low correlation to traditional investments. The correlation of managed futures to equities has been close to zero over
three-, five-, and 10-year periods.“

However, most of the growth has come from institutional investors and very high net worth individuals. But a new structure for managed futures — mutual funds — opens the investment category to individuals with only a $2,500 minimum investment.

“Institutions gain a lot of benefit from spreading their investments across all the major investment classes and making alternative investments,” says Lasse Pedersen, principal at AQR Capital Management. “Having an alternative investment strategy available in a mutual fund has allowed individuals to have a more institutional-like portfolio. “

Since Rydex/SGI launched the first managed futures mutual fund in March 2007, five additional companies have started funds. Mutual funds now account for more than $3 billion of the industry’s $247 billion under management.

Daily Liquidity
The mutual fund structure offers investors many benefits in addition to the low minimum investment requirements.

“One of the key advantages of the mutual fund structure is that investors have daily liquidity with the ability to get out of the trade at any time they like,” says Bob Enck, CEO of Equinox Fund Management. “The other key ingredient: There is an independent board of trustees that oversees the fund. That independence helps insure a high degree of oversight.”

Diversification
“The ability to invest in a strategy that can be long or short across a multiple commodity segments is another benefit of managed futures mutual funds,” says Andy O’Rourke, chief marketing officer of Direxion Funds. “You get broad diversification from the multiple commodity segments and the ability to profit from upside or downside trends. If you’re not capitalizing on both the upside and the downside, you’re probably not going to get sustainable returns.”

“The idea of being short might have been very scary to some individuals, but in a mutual fund structure you have professional managers doing it in a carefully monitored and diversified way so you get the benefits of shorting in a very risk-controlled fashion,” says Jerry Chafkin, president and CEO of AlphaSimplex Group, an affiliate of Natixis Global Asset Management.

Although mutual funds offer daily liquidity, managed futures are still a long-term investment. “Several well-known studies support the argument that managed futures can improve the efficient frontier when included in a portfolio’s long-term asset allocation,” Chafkin says. “When there is an extended market dislocation, managed futures tend to perform particularly well because they can identify the downward trend and start making money even as traditional investments continue to decline in value.”

Sundt emphasizes that “You don’t get into managed futures to chase returns; you invest in managed futures to give you steady long-term performance that is diversified from traditional investments.“

Institutions
While the lower investment minimums of mutual funds are an advantage to individual investors, many institutions are also investing in managed futures mutual funds.

“There seems to be a growing appetite by institutions for investing through highly regulated funds,” Enck says. “I think managed futures have been attractive to institutions because of the ability to utilize managed accounts, and mutual funds provide an additional layer of oversight and regulation for institutional investors. Many institutions are large enough to invest directly with a CTA but they don’t necessarily have the expertise to actively manage a portfolio of CTA programs.“

Each of the mutual fund companies we spoke with said registered investment advisors have been key to the success of their managed futures mutual funds.

“We’re getting allocations from the broker/dealer network and registered investment advisors because they’ve been looking for access to managed futures, but they’ve been avoiding it because of the cumbersome nature of private placements and public commodity pools,” Sundt says.

All the fund companies we spoke with also have additional managed futures mutual fund products on the drawing board, so we will provide updates about this segment of the industry in future issues.