Managed futures funds took some of the sting out of Brexit

Safe haven currencies, bonds and metals soothed some wounds

Jul 6, 2016 @ 11:04 am

By John Waggoner

+ Zoom

U.S. and European stock markets reeled from the United Kingdom's decision to leave the European Union. But one subcategory — managed futures funds — did a surprisingly good job in easing some of the pain from Britain's decision to make a Brexit.

And, at least for two days, the damage was considerable. Markets had long assumed that the U.K. would never leave the E.U. And when the referendum vote came in, markets reacted badly. The MSCI Europe, Australasia and Far East (EAFE) index tumbled 8.46% from June 23-27, while the Standard and Poor's 500 stock index fell 4.07%, assuming dividends were reinvested.

Alternative funds, of course, are supposed to offer returns that are not correlated with the major stock indices. A two-day period is hardly a long-term study. And, to their credit, most liquid alts didn't fall apart. During the two days after the Brexit referendum, market neutral funds fell a modest 0.47% and long-short equity funds fell 2.63%. That's certainly better than the S&P 500.

Managed futures funds, however, were boosted both during the Brexit panic and the post-Brexit rally, gaining an average 3.6% over the entire period from June 23 through July 1. Only seven of the 56 managed futures fund tracked by Morningstar lagged the S&P 500 in June.

At least in theory, managed futures are supposed to reduce risk and increase return in a stock or bond portfolio. The low correlation between managed futures and stocks was first detailed by John Lintner of Harvard in 1983. This doesn't mean that managed futures will necessarily rise when stocks or bonds fall. It does mean, however, that they offer the possibility of doing so, and of smoothing out market disruptions, including unexpected ones like the Brexit vote.

“It's been said that diversification is protection against ignorance, and there's some truth to that,” said David Kabiller, founder and head of business development at AQR. “You have to invest with a level of humility to understand there's a lot of uncertainty in the world from a regulatory and economic standpoint.”

Futures traders typically need markets moving in a strong trend up or down to make money. And, while the U.S. stock market was volatile leading up to the British referendum, other markets were showing strong trends, says Yao Hua Ooi, principal at AQR.

AQR uses a 1-month to 12-month trend-following approach at AQR Managed Futures Strategy HV I (QMHIX), which clocked a 8.52% gain in June, versus a 0.26% gain for the S&P 500. “Leading up to the Brexit vote, financial markets were picking up on the probability of potential 'leave' events,” Mr. Ooi said. “Our strategy going into the vote was being long fixed income, long safe-haven assets like the yen, gold and silver.”

Other managed futures funds deserve a nod for their June performance. Arrow Managed Futures Strategy A (MFTFX) gained 12.12% in June, according to Morningstar, Monte Chesapeake Macro Strategies (MHBAX) rose 8.76%., and Longboard Managed Futures Strategy (WAVIX) increased 8.66%.

Managed futures funds can differ widely in their approaches, and you should thoroughly investigate what they can and can't do. Some funds, for example, are long-only, meaning they can only bet on price rises. Others, like AQR's offering, can bet on falling prices. Still others vary on the amount of risk they take, so investigate a fund offering carefully.


What do you think?

View comments

Recommended for you

Featured video


Federated's Orlando: The economic and financial midyear outlook

As a country, are we stuck in neutral? Federated's Phil Orlando explains what he believes needs to happen to create an economic surge. (Hint: It rhymes with "crump.")

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

10 funds with largest 3-year outflows

Even well-managed funds that have beaten the S&P 500’s 10.1% average annual gain have watched investors flee.

Wirehouse training programs are back

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

New military pension rules need financial advisers to step up and serve

Matching defined contribution plan expected to see more money, more need for sound advice.

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print