With managed futures funds, think long think wrong

Volatility generally spells trouble for managed-futures funds. But a number are poised to outperform if the market’s sleepy summer gets more exciting as the elections and fiscal cliff get closer. Managed-futures funds, which invest in futures contracts, rely on momentum and trends to decide whether to be long or short a given commodity or asset class. The market’s risk-on, risk-off roller coaster has wreaked havoc on that strategy. Last year, the average managed-futures fund was down nearly 7% and this year, the average is off another 2.5%, according to Morningstar Inc. A small group of managed-futures funds, however, has outperformed — thanks to a strict focus on only short-term trends. “The managed-futures funds that are doing well are not your typical trend followers,” said Nadia Papagiannis, an alternatives analyst at Morningstar. The MutualHedge Frontier Legends Fund Ticker:(MHFAX), which focuses on short-term trends, for example, had a 1.73% return in 2011, nearly 900 basis points better than the category average. The fund is up 2.3% year-to-date, nearly 500 basis points better than the average. Perhaps most astonishing, those returns are net of the fund’s staggering 5.93% expense ratio. The higher expense ratio is a result of the fees charged by the commodity trade advisers with which the fund invests. The average managed-futures fund charges 2.67%, according to Morningstar. Higher expenses tend to be the norm for the short-term funds, Ms. Papagiannis said. “They’re been more profitable, but they’re also more expensive,” she said. Running counter to that assertion is the fact that the best-performing managed-futures fund of this year, the 361Managed Futures Strategy Fund Ticker:(AMFQX), has returned 8% year-to-date and has an expense ratio of 2.63%. The fund, which was launched in November, follows a countertrend strategy that looks to buy oversold positions and short overbought positions, which it measures via an index’s 50-day moving average. The strategy is set up to take advantage of short-term swings; its average holding period is only about three days, said Brian Cunningham, president and chief investment officer of 361 Capital LLC, the fund’s adviser. “What we’re looking for is short-term overreactions in the market, based on human emotion,” he said. The fund is limited to investing in futures contracts on the S&P 500, Nasdaq and Russell 1000, which have liquid futures markets, to keep transaction costs minimal, Mr. Cunningham said. Short-term trend-following strategies, not surprisingly, suffer the most when there is a long-term trend. In the first quarter of the year, as the S&P 500 marched upward, 361 Capital’s fund was down 90 basis points. Markets trending up or down favor longer-term-trend funds, said Ms. Papagiannis. While beta, which is the non-correlated returns to stocks and bonds and is the one of the main appeals of managed-futures funds, historically has come from longer-term trend funds, the short-term trend funds have outperformed since they first came on the scene in 2011. The fiscal cliff, the election, the ongoing troubles in Europe and China all point toward volatility continuing for the foreseeable future, however. That leads Ms. Papagiannis to believe the short-term managed-futures funds are likely to continue outperforming. “In the near-term, the short-term trend followers are going to be more profitable,” she said. (Want to learn more about alternative investments and where they fit in client portfolios? Check out the InvestmentNews Alternative Investments Conference at the Fairmont Chicago Millennium Park on Oct. 22-23. Learn about liquid and illiquid alternatives, real estate, hedging strategies and ways to generate more income through alternatives.)