State Street Global Advisors is preparing to launch a commodities-free managed-futures fund that will invest in equity, fixed-income and currency futures.
Managed-futures funds typically come in two flavors, those that invest only in commodities or those that combine commodities futures with equities, fixed-income and currencies. Commodities typically are the most volatile asset class in which managed-futures funds can invest, so combining them with the three other asset classes lowers the overall volatility of the fund.
Managed-futures funds that invest in commodities only have 12% to 18% volatility, while funds that blend the four asset classes together typically have 8% to 10% volatility, according to Morningstar Inc.
By leaving commodities out of the SSgA SSARIS Managed Futures fund altogether, the fund should have even lower volatility, according to SSgA. In a prospectus filed with the Securities and Exchange Commission last Friday, the company also said it would be targeting futures contracts with low daily standard deviation. Marie McGehee, a spokeswoman for SSgA, declined to comment on the filing.
The downside of leaving out commodities could be lower returns. While commodities tend to have the highest volatility, they're also a potential source of big returns for managed-futures funds, which basically are trend-following strategies.
“When there is a trend in commodities, it tends to be a strong trend,” said Terry Tian, an alternative investments analyst at Morningstar. He pointed to this summer's soaring corn prices as an example.
The strongest trend in managed-futures mutual funds over the past two years has been underperformance. According to Morningstar, the category's average return is -4% so far this year.
One managed-futures fund that eschews commodities has been able to generate solid returns by focusing only on equity futures. The 361 Capital Managed Futures Fund Ticker:(AMFQX) has returned more than 6% this year.
Despite the broad performance woes for the group, investors are still showing strong interest. Some $700 million flowed into managed-futures funds this year through the end of August, according to Morningstar.
That pace is unlikely to match the $3.2 billion that was invested in those funds in 2011 but the fact that flows are still positive while so much money continues to fly out of stock funds shows investors aren't giving up on managed futures.
“The interest is still there because of the diversification,” Mr. Tian said. “Investors are still looking for different return streams.”