Managed futures funds capitalizing on junk-bond fallout

The carnage unfolding in the high-yield bond market has paved the way for a serious rally among managed futures strategies that are designed to take advantage of precisely these kinds of trends.
As usual with alternative-strategy funds, the performance dispersion across the category has been wide, but some of the funds are up more than 20% since the start of the year, even though the category average is down 0.2% over the same period.
For example, LoCorr Long/Short Commodity Strategy (LCISX), is up 22.5% year-to-date, Goldman Sachs Managed Futures Strategy (GMSSX), is up 11.4% and Longboard Managed Futures Strategy (WAVIX), is up 11.2%.
By contrast, fund categories representing the broader commodity complex that is at the root of much of the recent junk-bond selloff are taking a beating this year.
The energy equity sector fund category fell more than 27% this year, the master limited partnership category dropped 40.6%, the commodity broad basket lost 24%, and high-yield bond funds fell 5%.
High yield funds are holding up better than the rest, relatively speaking, because the most problematic area is the lowest-quality bonds in the high-yield space, typically rated triple-C or lower.
The poster child for what could go wrong emerged last week when Third Avenue Management announced plans to liquidate and then freeze investor redemptions from its Third Avenue Credit Focused Fund (TFCVX).
That lowest-quality high-yield debt represents about 10% of the overall high-yield bond market, but the Third Avenue fund had a 28% allocation to such distressed debt.
The trend that caught Third Avenue flat-footed has been unfolding over the past 18 months, in the form of a general collapse of the commodity sector. Couple that with the rallying U.S. dollar, and you’ve got a twin-set of trends that has managed futures managers licking their chops.
“There’s definitely a portion of alternative-fund managers that have benefited from this,” said Dick Pfister, founder and chief executive of AlphaCore Capital.
“If there’s an extenuating trend somewhere those guys should be able to capture it, and right now it looks like they’re playing both sides of the strong dollar and weak commodities,” he added. “This shows you how alternative strategies can help protect people in times like these.”
Managed futures funds haven’t had this kind of day in the sun since the heart of the financial crisis in 2008, when the Credit Suisse Managed Futures Index gained 23% while the S&P 500 Index lost 39%.
For some investors and financial advisers, that 2008 performance put managed futures funds in the limelight for the first time. But a lack of significant market trends since then, tamped down largely by Federal Reserve policy, led to a half dozen years of lackluster performance for the category.
That all started to change about a year a half ago when the Fed first slowed its multi-trillion-dollar quantitative easing programs and nodded toward the first rate hike since 2006.
“The trends are coming back. That’s why we added managed futures exposure back in February,” said Bradley Alford, chief investment officer at Alpha Capital Management.
“They act as insurance, and will capture both up and down trends,” he added. “The Fed was able to change the game for a while and there were no long trends, but now we’re seeing some.”