Market volatility and ongoing investor uncertainty were hallmarks for much of the year. In an environment of elevated inflation and interest rates, advisors and investors increasingly turned to alternatives to diversify their portfolios. Managed futures offer a number of long-term benefits that make them worthy of consideration.
The alternatives bucket is wide and varied, ranging from private equity to hedge fund strategies and more. Managed futures are a strategy previously relegated to hedge fund investors but are now widely available to investors through a number of ETFs.
The strategy entails investing in futures contracts where managers take long and short positions across four core asset classes. Hedge fund managers of these strategies are referred to as commodity trading advisors (CTAs). Futures are a derivative contract whereby assets are bought and sold at an agreed price at a specific point in the future. They trade on futures exchanges such as the CME and are generally fairly liquid.
Alternatives for Modern Markets: Managed Futures
Investors employ futures in a number of ways in portfolios. Use cases include speculating on prices and hedging against future prices of any number of asset classes. Managed futures strategies invest across several asset classes, including rates, equities, commodities, and currencies.
These strategies take long and short positions on asset classes via the futures market. Because they trade in futures, they carry low to negative correlations to stocks and bonds. It makes them a strong diversifier for portfolios.
Managed futures strategies are often seen as the ultimate trend-following strategy. The strategy reads technical indicators to determine whether it takes a long or short position in an asset class via futures. These funds invest in how asset classes are currently trading and not on a future performance forecast. In volatile, uncertain markets, trends can prove difficult to track. However, in a new market regime of higher inflation, it’s a strategy worth including long term.
As an asset class rises in trading, managed futures take a long position via futures. Conversely, when asset classes fall in trading, these strategies take short positions via futures, allowing the fund to benefit on asset class losses.
These strategies are actively managed and based on technical indicators. Because they respond to how assets are currently trading, they capitalize on market dislocations faster than more traditional investment strategies. It’s what earned them the nickname the “crisis alpha” generators.
Managed Futures ETFs
Managed futures ETFs opened the door to the hedge fund strategy for all investors. They use a number of different methodologies, and it’s important to understand what’s under the hood of each strategy.
The KFA Mount Lucas Managed Futures Index Strategy ETF (KMLM) does not carry exposures to equities. The Simplify Managed Futures Strategy ETF (CTA) does not carry exposure to equities or currencies. Meanwhile, the WisdomTree Managed Futures Strategy Fund (WTMF) includes exposure to Treasuries via an ETF, the WisdomTree Floating Rate Treasury Fund (USFR).
The iMGP DBi Managed Futures Strategy ETF (DBMF) uses a proprietary, quantitative model for replication of the average performance of the 20 largest managed futures hedge funds. The fund analyzes the trailing 60-day performance to determine a portfolio of liquid contracts that mimic the performance (not the positions). It removes single-manager risk within the space while providing an “index-plus” approach to managed futures investing.
For more news, information, and analysis, visit the Managed Futures Channel.