Portfolios that include managed futures funds perform better and reduce more risk than those without them, according to research jointly published by the Alternative Investment Management Association (AIMA) and Societe Generale.
The paper, titled ‘Riding the Wave’, analysed the risk and return profiles of investment portfolios including and excluding managed futures funds from 2000-2016.
For example, it showed the performance of a traditional asset mix of 60% bonds and 40% equities is enhanced with the addition of CTA strategies, which may increase the return and risk-adjusted returns (by lowering the volatility), as well as considerably lowering and shortening drawdowns.
The paper also found that the largest drawdown – or peak-to-trough decline – for managed futures funds since 2000 was less than a quarter of the scale of the largest drawdown for global equities (-11.63% versus -53.65%).
It notes that the managed futures sector collectively performed well at the height of the global financial crisis, with all the CTAs in the Societe Generale managed futures database reporting positive returns in 2008, while many were up by more than 30% for the year.
The research is published at a time of rising investor interest in managed futures funds, with AIMA and Societe Generale citing data that shows that the sector has grown nine-fold since 2000, reaching $340 billion in assets under management at the end of 2016. They claim that managed futures funds recorded a $10.4 billion net inflow in Q2 2017 – the largest inflow of any hedge fund strategy.
But despite this inflow of investment, many managed futures strategies have struggled over the past two years. Profit & Loss took an in-depth look at this segment earlier this year, questioning whether the relatively poor performance of CTAs in 2016 was likely to continue this year.
Thus far, 2017 has largely been another year to forget for managed futures funds. At the end of August, the BarclayHedge CTA Index was down -0.51% for the year, and some investors are wary of investing in this segment right now, as Profit & Loss noted in a podcast published in August.
Commenting on the new research paper, AIMA’s CEO, Jack Inglis, says: “Our latest educational paper will help investors better understand managed futures and will go some way to dispel the idea they are black boxes that can’t be understood. It provides insight into the criteria that need to be considered when investing in managed futures, especially as the number of strategies, exchanges and execution techniques mean no two are the same. Increased inflows show that managed futures have a role to play when providing downside protection and we hope this paper will help investors when considering how to balance their portfolio.”
Societe Generale Prime Services’ Tom Wrobel, a member of the alternative investment consulting team, adds: “The continued inflows into CTAs mean they are becoming a more ‘mainstream’ strategy on the radar of institutional investors. Being part of this AIMA analysis has been important for us to shed light on the evolving managed futures industry with our clients, especially those exploring it for the first time. At Societe Generale Prime Services, we monitor trends in the CTA space, and calculate a set of indices and indicators, to provide analysis and track the performance of the CTA industry. As performance has been mixed this year, consolidating all of these findings makes it easier to follow and understand the CTA space for those interested in exploring it as a strategy.”