By Philip van Doorn
Funds that follow managed futures strategies have been outperforming benchmark indexes by a wide margin this year.
They tend to have different approaches and can be risky. But for a typical investor with a majority of assets invested in the stock market, having a modest portion allocated to managed futures can lower overall portfolio risk, according to Mike Loewengart, managing director of investment strategy for E-Trade from Morgan Stanley.
A managed futures strategy is one through which a money manager will move in or out of various asset classes, including commodities, currencies, bonds and stocks across geographies, employing long and short positions to take advantage of market trends.
There’s no crystal ball — managers don’t predict events, but they will jump on or away from a pricing trend, hopefully at an early stage. That can lead to performance that runs counter to that of the broader stock market.
During an interview, Loewengart said: “There is no doubt that in recent months we have seen more interest in managed futures funds, and more specifically the commodities space in general.”
Managed futures is a type of “liquid alternative” strategy that wasn’t available to most investors until about 10 years ago, when mutual funds began to employ the strategy, Loewengart explained.
“Before that, you had to seek a private vehicle,” he said, which meant being able to meet the high account minimum for a hedge fund.
“After years and years of seeing diversified portfolios lag, because nothing kept up with large-cap equites, it is encouraging to see these strategies providing value to investors,” he added.
Four managed futures funds
First, look at this year’s performance for four funds that employ managed futures strategies compared with the benchmark S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.30% through May 12:
All four of the managed futures funds have produced gains this year as the S&P 500 has dropped 17% (with dividends reinvested). The best performer is up 32%.
It’s important to review longer time periods. This is two-year performance:
Now you can see that through a longer period, all five approaches have been viable, with the S&P 500 soaring to the greatest heights before falling to the middle of the pack.
Here’s a breakdown of the four funds:
The iMGP DBi Managed Futures Strategy ETF /zigman2/quotes/212244030/composite DBMF +0.69% is the only exchange traded fund on the list. It is actively managed and seeks to give access to hedge-fund-like strategies to seek long-term capital growth for relatively low fees. See this ETF Wrap column for Christine Idzelis’ interview with Andrew Beer of Dynamic Beta investments (DBi).
The AlphaSimplex Managed Futures Strategy Fund /zigman2/quotes/206397015/realtime AMFNX +0.51% follows what it calls an “absolute return strategy,” using various asset models to take long and short positions across asset types, globally. It is included on the E-Trade from Morgan Stanley All-Star Mutual Funds list.
The Pimco Trends Managed Futures Strategy Fund /zigman2/quotes/202654431/realtime PQTIX -0.44% also follows a strategy designed to take advantage of price momentum across asset types, to provide positive returns “particularly during equity market downturns.”