Key Takeaways
- • Managed futures delivered 36% gains in 2023 year-to-date through Q3, vastly outperforming a traditional 60-40 equity-bond portfolio, which declined 20% amid macroeconomic deterioration, according to the SG Trend Index tracking the ten largest managed futures funds.
- • Trend-following strategies, which take long and short positions across liquid futures in currencies, commodities, fixed income, and equities, have rebounded sharply after underperforming throughout the 2010s, positioning the strategy as a recovery play for institutional investors reassessing hedge fund allocations.
- • AQR forecasts continued managed futures outperformance in 2023, predicting that sustained economic volatility and persistent macroeconomic uncertainty—driven by inflation concerns and recession risks in the U.S. and Europe—will create the exact conditions that favor trend-following strategies.
- • High macroeconomic volatility persistence is the key thesis supporting entry, according to Yao Hua Ooi, principal at AQR; the firm argues investors need not fear timing concerns, as trend-following strategies perform best precisely when volatility is elevated and tends to remain elevated.
- • Market sentiment presents a timing concern for institutional allocators, as some investors fear missing the peak performance window and cite the strategy's decade-long underperformance as a reason for caution, though AQR directly rebuts this hesitation.
Summary
Managed futures strategies have experienced a notable resurgence in 2022, delivering performance that sharply contrasts with traditional multi-asset portfolios. According to AQR's latest research, the SG Trend Index—a benchmark tracking the ten largest managed futures funds—posted a 36% gain through the first three quarters of the year. This performance stands in stark relief against the 20% decline of a conventional 60-40 stock-and-bond allocation, highlighting the strategy's value during periods of macroeconomic stress.
Trend-following strategies, which form the core of managed futures, operate by taking simultaneous long and short positions across predominantly liquid futures contracts spanning currencies, commodities, fixed income, and equities. After a decade of lackluster returns during the 2010s, these strategies are experiencing a meaningful comeback. AQR's position is that this recovery is not merely cyclical but structurally supported by the macroeconomic environment expected to persist into 2023.
The investment thesis rests on several durable headwinds to economic stability. AQR identifies inflation pressures and mounting recession risks in developed markets as structural challenges that will sustain elevated volatility. The firm argues that "several key challenges impeding a return to a calm economic environment" make it "improbable that economic conditions will settle into anything resembling their pre-pandemic stability within the next year or two at a minimum." These conditions are precisely those in which trend-following performs optimally, as strategies profit from directional market moves and regime shifts.
A critical concern raised by institutional investors is whether entry into managed futures at current levels represents poor timing—specifically, whether performance has already peaked. Yao Hua Ooi, principal at AQR, directly addresses this hesitation. He argues that because trend-following strategies perform best when macroeconomic volatility is high and such volatility tends to persist once elevated, investors need not fear entering late in the cycle. The elevated volatility itself becomes the protective characteristic that ensures continued outperformance, distinguishing managed futures from traditional strategies that suffer when volatility spikes unexpectedly.
AQR's argument presents a compelling case for institutional allocators seeking diversification and downside protection as economic headwinds intensify through 2023. The strategy's documented 2022 performance, combined with forward-looking macro conditions, positions managed futures as a tactical allocation opportunity for sophisticated investors reassessing portfolio construction in an inflationary, volatile environment.
Trend-following strategies, which form the core of managed futures, operate by taking simultaneous long and short positions across predominantly liquid futures contracts spanning currencies, commodities, fixed income, and equities. After a decade of lackluster returns during the 2010s, these strategies are experiencing a meaningful comeback. AQR's position is that this recovery is not merely cyclical but structurally supported by the macroeconomic environment expected to persist into 2023.
The investment thesis rests on several durable headwinds to economic stability. AQR identifies inflation pressures and mounting recession risks in developed markets as structural challenges that will sustain elevated volatility. The firm argues that "several key challenges impeding a return to a calm economic environment" make it "improbable that economic conditions will settle into anything resembling their pre-pandemic stability within the next year or two at a minimum." These conditions are precisely those in which trend-following performs optimally, as strategies profit from directional market moves and regime shifts.
A critical concern raised by institutional investors is whether entry into managed futures at current levels represents poor timing—specifically, whether performance has already peaked. Yao Hua Ooi, principal at AQR, directly addresses this hesitation. He argues that because trend-following strategies perform best when macroeconomic volatility is high and such volatility tends to persist once elevated, investors need not fear entering late in the cycle. The elevated volatility itself becomes the protective characteristic that ensures continued outperformance, distinguishing managed futures from traditional strategies that suffer when volatility spikes unexpectedly.
AQR's argument presents a compelling case for institutional allocators seeking diversification and downside protection as economic headwinds intensify through 2023. The strategy's documented 2022 performance, combined with forward-looking macro conditions, positions managed futures as a tactical allocation opportunity for sophisticated investors reassessing portfolio construction in an inflationary, volatile environment.
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