Don't overlook lagging managed futures as a risk hedge

The alt strategies offer downside protection for another 2008-like scenario

Jun 22, 2012 @ 1:25 pm

By Jeff Benjamin

Managed-futures strategies haven't been hot performers for at least two years, but asset flows and investor interest suggests the strategy is being viewed as a solid hedge against risk.

“Managed-futures funds were negative last year and they're negative this year, but the flows have been positive,” said Don Phillips, president of fund research at Morningstar Inc.

“One of the things I like about what's happening in alternatives is that most advisers are now looking for noncorrelated asset classes,” he said.

During a panel discussion at Morningstar's annual conference on Wednesday, three managed-futures portfolio managers were unapologetic about the recent performance and stressed the need to consider alternatives as portfolio diversifiers.

“If we get into another 2008 scenario [when 25% of all U.S. stocks lost at least 75%] you have to ask yourself what is in your portfolio that will provide protection to your assets, and protect you from a 50% to 70% drawdown,” said Ryan Harder of Guggenheim Investments.

The key to using alternatives like managed futures in a portfolio is to have a serious and deliberate commitment to the strategy, according to Brian Hurst of AQR Capital Management LLC.

“It seems like everybody wants to time everything,” he said. “If you can't get your client comfortable for alternatives, then the right allocation is zero, but if you understand it and your client is comfortable with it, then it would be good to take baby steps with allocations of 5% to 10%.”

Mr. Hurst added that some investors who have been allocating to managed futures for 10 years or more might have more than 30% weightings in the category.

Matt Osborne of Altegris Advisors LLC agrees that the best way to utilize alternative strategies is to maintain a steady allocation throughout full market cycles.

“Our view is that managed futures should be a long-term asset allocation decision, not a timing decision,” he said. “However, investing when an asset class is down tends to be a better time than when an asset class is up, and now might be an interesting time to increase allocations when managed futures have had a period of softer performance.”


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