Managed futures funds gaining traction among advisers

Experiencing poor performance of late, the investment serves as a useful hedge against stock, bond downturns

Dec 16, 2016 @ 12:36 pm

By John Waggoner

Investment advisers plan to increase their allocation to managed futures in 2017, according to a survey taken by Altegris Advisers at the InvestmentNews Alternatives Conference in Miami last month.

The survey is based on responses from 101 conference attendees, all of whom described themselves as financial advisers and registered investment advisers. Nearly half, or 47%, currently use managed futures in their client accounts, and 41% intend to increase that allocation next year.

Key findings:

• 25% use managed futures to diversify traditional stock and bond portfolios.

• 31% thought managed futures should be more than 5% of a client's investment portfolio.

• 28% would allocate to two managed futures funds to gain futures exposure.

• 86% already use alternative investments in their portfolios.

“I'm pleased that almost half use managed futures,” said Matt Osborne, chief investment officer for Altegris and manager of the Altegris Futures Evolution Fund (EVOIX), which sponsored the survey. While the survey pool admittedly skewed toward advisers interested in alternative investments such as managed futures — it was conducted at an alternatives conference — Mr. Osborne said there was still work to do in educating advisers about managed futures.

Managed futures have long been a staple of hedge fund offerings, with a history that goes back several decades. They were widely seen as a highly speculative investment for the ultrawealthy. But a pioneering 1983 study by Professor John Lintner of Harvard, titled “The Potential Role of Managed Commodity - Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds,” suggested that adding managed futures to a stock and bond portfolio reduced risks. Those findings have been confirmed in several studies since then.

Early managed futures funds were limited partnerships, typically with high fees and limited redemption periods. (Many would also liquidate in the event of a 50% drawdown, theoretically limiting loss exposure to 50% before fees). The fund industry has rolled out 52 new open-ended managed futures funds since the first appeared in 2005.

As a group, managed futures funds have had less than spectacular records recently rising an average 0.19% the past five years and posting a 1.68% loss for 2016. Those weak returns have made it difficult to educate financial advisers about the benefits of managed futures, Mr. Osborne said.

“The category hasn't set the world on fire, and if you missed the nine months from mid-2014 to 2015, you missed a lot of the return available. But managed futures do have short, sharp periods of outperformance, and advisers need to own these funds as a strategic rather than a tactical investment. Managed futures have a long-term correlation of zero to the equity market.”

While futures are often seen as an inflation hedge — the prices of real goods rise in inflationary times — they also can be good hedges against rising interest rates, Mr. Osborne said. A typical fund can go short against the bond market, something relatively few other funds can do.

“It's a unique edge,” Mr. Osborne said.

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