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.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

How to build a better business plan

Financial advisers are good at a lot of things, but business planning isn't always one of them. Why is that and how can they improve? Teri Shepherd of Carson Group offers some solutions.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

Finra ranking brokers in effort to crack down on industry's bad apples

All 634.403 reps have been ranked based on factors such as prior regulatory disclosures, disciplinary actions and employment history.

How to save retirement planning from tax reform

Losing big deductions, even in lieu of a larger standard deduction, may cause taxes to rise in retirement.

Advice firms in a tricky financial position

As revenue growth dips and salaries rise, nearly 90% of firms are at or near capacity.

In a turnaround, Wells Fargo Advisors sees slight bump in headcount

Racked by a scandal in its retail banking unit, Wells still managed to add 37 new advisers in the third quarter, a small number but an improvement nonetheless.

Social Security benefits to increase by 2% in 2018

Largest cost-of-living adjustment since 2012 may be offset for some by higher Medicare premiums.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print