The Mount Lucas president and CIO Tim Rudderow recently sat down with KraneShares to discuss current market environments and the benefits that managed futures have to offer investors right now. Rudderow pioneered systematic trend-following and managed futures to provide investors with uncorrelated returns amid market volatility and significant events.
Futures markets are a mechanism that helps businesses account for and give stability to their price risk potentials. Businesses must account for a variety of outside risk factors that they have no control over, such as changing interest rates, the shifting values of currency, and commodity prices. The futures market helps them hedge against these risks, explains Rudderow.
“For example, an airline is in the business of flying passengers, not forecasting the price of jet fuel. Futures markets allow the airline to ‘hedge’ that risk, that is, lock in the price for the future,” Rudderow said. “This allows them to stabilize their cost base, permitting more accurate pricing and planning in their core business.”
Futures markets carry risk potentials in the long and short, and during times of volatility, investor capital is necessary to help absorb the risks. Investors receive premiums in exchange for providing the capital that allows companies to lower their risk, a premium that is paid during times of extreme market movement.
“Since that premium is paid in periods of high volatility, periods where traditional investments often suffer, we might expect the returns to futures investment to provide an independent, diversifying return stream,” Rudderow explained.
Mount Lucas Management was the first to create a price-based index on futures returns that utilizes a trend following algorithm to simulate investor behavior and involvement in futures markets. The KFA MLM Index seeks to offer moderate returns during low volatility times in markets by being cost-efficient with fees and low turnover and leaning on the returns from equity assets.
During rapid movement and volatility by markets, the algorithm seeks to continue returns without pinpointing market fluctuation points or reducing exposures. Looking forward in an environment with rising commodity prices and record inflation, Rudderow sees the potential for an economic headwind for equity investing while interest rates being increased to help lower inflation would adversely affect bond investing.
“Managed futures strategies tend to perform well during periods of sustained price movements, both up and down, adding much-needed diversification to a traditional portfolio allocation,” Rudderow said.
Investing in Managed Futures 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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