Rethinking Managed Futures in a Low Fee World

Managed futures as a strategy (before high hedge fund fees) has delivered strong performance since 2000 – higher returns than equities with far lower volatility. As a diversifier, managed futures offer more “bang for the buck” than bonds, commodities and REITS. These results are obscured by excessive hedge fund fees and expenses, which have consumed a high percentage of gross returns and virtually all alpha especially in recent years. A new generation of lower cost investment products seek to deliver most or all strategy alpha to end investors. Consequently, asset allocators should re-examine managed futures in light of the performance of the strategy, not historical returns of high cost hedge funds.

Managed futures index returns, as reported, have three components:

STRATEGY RETURNS
Performance generated by the trading activity of the portfolio manager
RETURNS ON CASH COLLATERAL
Most of the managed futures portfolio assets sit in cash invested in short term rates
MANAGER-LEVEL FEES
Managers usually charge management fees - as a percent of total assets - and incentive fees - as a percent of performance -
  • Industry-standard benchmarks are hedge fund indices where funds typically report performance using the most expensive share classes; consequently, benchmarks tend to reflect fees and expenses of 300 bps or more per annum.
  • Hence, recent critiques about performance often mistakenly conflate those high fees with sub-par strategy returns.

Managed futures as a strategy has delivered better performance than most investors realize. Since 2000, they:

Since January 2000, managed futures (before fees) has delivered better risk-adjusted returns than most traditional asset classes.

  • Over rolling five year periods, managed futures outperformed cash, on average, by 6.0% per annum.
  • Importantly, in no five year period did managed futures generate a negative return or underperform cash.
  • In every five year period since January 2000, managed futures outperformed cash.  By contrast, the S&P 500  outperformed cash only 69% of the time.
  • Where most other asset classes materially underperformed cash at some point, the worst five year period for managed futures still showed outperformance.
  • Relative to The MSCI World alone, an 80/20 portfolio with managed futures could have materially improved returns, lowered volatility and drawdowns, and increased risk-adjusted returns since January 2000.
  • The charts below show the impact of adding a 20% allocation to managed futures versus other diversifiers:
  • Managed futures tends to perform best during the worst equity market drawdowns – when most asset classes reprice and trend strongly.  Positive performance during bear markets is often termed “crisis alpha.”
  • Managed futures has maintained a Sharpe ratio at or above 0.5 for the greater part of 20 years while most asset classes, including the S&P 500 below, have varied widely through different market cycles.

In a low fee world, asset allocators should re-examine managed futures as a strategy before fees; like stocks and bonds, investors should evaluate the “strategy” and then determine which investment products may best deliver that performance.

If you want to learn more about Managed Futures, don’t hesitate to reach us via the contact form.

Important Disclosures

Dynamic Beta investments LLC (“DBi”) is an independent registered investment adviser. DBi claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. The firm’s list of composite descriptions is available upon request.

This brochure is prepared and circulated for informational purposes only and shall not constitute an offer to sell or the solicitation of an offer to purchase any fund or programs offered by DBi (“Programs”) in any jurisdiction.  Such an offer may only be made pursuant to the definitive Confidential Offering Memorandum or Trading Advisory Agreement of the Programs, which will be furnished to qualified investors on a confidential basis upon request.

RISK DISCLOSURE

Past results are not indicative of future results.

Investment in the Programs is speculative and involves a high degree of risk, including the risk that the entire amount invested may be lost. The use of a proprietary technique, model or algorithm does not guarantee any specific or profitable results.  There is no assurance that the Programs will be profitable. Investment returns will fluctuate and the value of an investor’s interest in a Program will fluctuate and may be worth more or less than the original investment when redeemed.

Pursuant to an exemption from the Commodity Futures Trading Commission in connection with accounts of qualified eligible persons, this brochure or account document is not required to be and has not been filed with the commission.  The Commodity Futures Trading Commission does not pass upon the merits of participating in a trading program or upon the adequacy or accuracy of commodity trading advisor documents or brochures.  Consequently, the Commodity Futures Trading Commission has not reviewed or approved this trading program or this brochure.

GLOSSARY OF TERMS

Maximum Drawdown measures the peak to trough decline of investment performance over a given period of time.

Compounded Annual Return measures the annual rate of return of an asset over multiple time periods.

Annualized Standard Deviation measures the annualized volatility of an asset over multiple time periods.

Sharpe Ratio measures the excess returns of an asset divided by the assets volatility over a given period of time.

SOURCES

Some of the information presented in this brochure includes information that has been obtained from third-party sources.

INDEX DEFINITIONS

Global Agg refers to the Barclays Global Aggregate Index measures the performance of  the global investment grade bond market.

High Yield refers to the iBoxx High Yield Index which measures the performance of the US high yield bond market.

Managed Futures refers to the SocGen CTA Index adjusted for management and performance fees. The SG CTA Index reflects the performance of a pool of Commodity Trading Advisors (CTAs) selected from the largest managers open to new investment. The index is equal-weighted and rebalanced annually. (Ticker: NEIXCTA Index)

S&P 500 refers to the S&P 500 Index. Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks and is designed to reflect the performance of large domestic companies across all major industries. Index performance utilized is total return and reflects interest, capital gains, dividends and distributions.

Commodities refers to the Bloomberg Commodity Total Return Index which measures the performance of a world-production weighted basket of commodities.

EAFE refers to the MSCI EAFE Index which is designed to track international equity performance across developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada. Index performance utilized is total return and reflects interest, capital gains, dividends and distributions.

Small Caps refers to the Russell 2000 Index which is an index designed to reflect the performance of small cap domestic stocks. Index performance utilized is total return and reflects interest, capital gains, dividends and distributions.

REITs refers to the MSCI US REIT Index which measures the performance of a basket of equity REITs.

Emerging Markets refers to the MSCI Emerging Markets Index which is designed to reflect the equity performance of large and midcap companies across 23 emerging market countries. Index performance utilized is total return and reflects interest, capital gains, dividends and distributions.

July 8, 2019