How KMLM Navigates Energy, Commodities, and Cryptocurrency

Mount Lucas president and CIO Tim Rudderow recently sat down with KraneShares to discuss how managed futures and the KFA MLM Index handle various sectors of the markets, such as energy and commodities, given current conditions. Rudderow pioneered systematic trend-following and managed futures to provide investors with uncorrelated returns amid market volatility and significant events.

Energy Sector Investing

Looking ahead within the energy sector, Rudderow explained that energy prices are extremely difficult to predict trends for and forecast, particularly given the recent turn to renewable energies and the push for ESG-minded practices. In a normal commodity environment, price increases, like those being seen currently in several parts of the energy sector globally, will ultimately have a pushback from increased supply that will bring prices back down. Because of the focus on ESG and limiting carbon emissions, it’s unclear how that supply response will look in the long term.

“What we do know is that the trend-following approach of a managed futures portfolio such as the KFA MLM Index is likely to benefit from sustained price movements, up or down, providing diversification to a portfolio in the face of uncertainty,” Rudderow said.

Staying Short on Gold Amidst Rising Inflation

Another major commodity discussed was gold, and the fact that the KFA MLM Index, the parent index for the KFA Mount Lucas Index Strategy ETF (KMLM), is currently short on gold. The reasoning comes down to performance: Gold’s price has continued to track lower overall, even given the rising inflationary environment.

For now, it’s not a good play, but because the fund utilizes the trend-following algorithm, it will be able to spot potential price dislocations and the index can respond accordingly, taking either a short or long position on gold.

“In the case of gold, the market has moved sideways for much of 2021 with no sustained trend occurring. This sideways price action has tightened the market premium/discount to the moving average, leaving the index in a position to potentially capture any sustained price action lower while also being well-positioned if the price were to rise, effectively allowing the index to enter on the ground floor should a trend higher form,” Rudderow explained.

Is Bitcoin Investment on the Horizon?

Bitcoin futures are not currently included within the KFA MLM Index, primarily because there isn’t enough maturity within the market, and it needs to grow more before the index would track it, said Rudderow. Another major point that would need to be clarified revolves around the nature of bitcoin in a portfolio; does it take the space of a currency investment, an equity that is representative of a crypto sector, or is it a commodity because it is mined?

“We would be more comfortable adding Bitcoin or some other cryptocurrency to the basket if and when it became a significant transactional tool, rather than purely a speculative vehicle,” Rudderow said.

For now, because bitcoin and other cryptocurrencies remain speculative, the index will not track them, but the introduction of bitcoin futures and ethereum futures is promising, and it’s a space, along with carbon markets, that is being watched closely.

See also: Is Now the Time for Managed Futures?

Managed Futures Investing With KMLM

The KFA Mount Lucas Index Strategy ETF (KMLM) from KFAFunds, a KraneShares company, offers investment with managed futures.

KMLM’s benchmark is the KFA MLM Index, and the fund invests in commodity currency as well as global fixed income futures contracts. The underlying index uses a trend-following methodology and is a modified version of the MLM Index, which measures a portfolio containing currency, commodity, and global fixed income futures.

The index weights the three different futures contracts types by their relative historical volatility, and within each type of futures contract, the underlying markets are equal dollar-weighted. Futures contracts will be rolled forward on a market-by-market basis as they near expiration.

The index evaluates the trading signals of markets every day, rebalances on the first day of each month, invests in securities with maturities of up to 12 months, and expects to invest in ETFs to gain exposure to debt instruments.

KMLM carries an expense ratio of 0.90%.

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