Key Takeaways
- • Managed-futures funds rebounded strongly in 2014 with average returns of 9%, attracting $1.4 billion in inflows during the first two months of 2015, including a single-month record of $800 million in January.
- • Morningstar rates only 1 of 5 major managed-futures funds (covering ~70% of category assets) as Positive, citing widespread concerns about excessive fees, lack of transparency, and unproven track records.
- • Trend-following strategies employed by managed-futures funds demonstrate research-backed potential to enhance portfolio risk-adjusted returns, particularly during volatile market environments with commodity price movements.
- • After underperforming relative to other alternative strategies for years, managed futures reversed trajectory from August 2014 onward, becoming the top-performing alternative category through year-end as volatility returned to markets.
- • Investors should approach managed-futures funds with caution despite recent performance improvements, as structural issues around pricing and transparency persist across most available products.
Summary
Managed-futures funds have rebounded from years of underperformance to capture investor attention in early 2015, driven by strong 2014 returns and renewed market volatility. According to Morningstar's analysis, the category averaged 9% returns in 2014, prompting substantial capital inflows of $1.4 billion in the first two months of 2015. January 2015 marked a record single-month inflow of $800 million, signaling investor appetite for the strategy.
The resurgence reflects a fundamental shift in market conditions. After languishing as the worst-performing alternative strategy among Morningstar's alternative categories, managed futures turned a corner in August 2014 as volatility returned to commodity markets and equities. From August through year-end 2014, managed futures emerged as the top-performing alternative category, validating the strategy's theoretical advantage during turbulent periods.
Managed-futures strategies employ trend-following approaches that research has demonstrated can meaningfully enhance portfolio risk-adjusted returns, particularly when broad market correlations break down. The category gained prominence after performing well during the 2008 financial crisis, spurring substantial asset growth and the creation of numerous new products following Morningstar's establishment of the managed-futures category in 2011.
However, Morningstar's review reveals significant structural problems limiting investor suitability. Among five major managed-futures funds representing approximately 70% of the category's aggregate assets under management, only one garners a Positive rating. The primary concerns center on three critical deficiencies: excessive fees relative to strategy complexity, insufficient transparency into portfolio construction and risk management, and unproven long-term track records for many products. While the category is showing incremental improvement in both transparency and pricing, Morningstar counsels a cautious approach to managed-futures investments at present, advising investors to resist performance-chasing behavior and conduct rigorous due diligence before committing capital.
The resurgence reflects a fundamental shift in market conditions. After languishing as the worst-performing alternative strategy among Morningstar's alternative categories, managed futures turned a corner in August 2014 as volatility returned to commodity markets and equities. From August through year-end 2014, managed futures emerged as the top-performing alternative category, validating the strategy's theoretical advantage during turbulent periods.
Managed-futures strategies employ trend-following approaches that research has demonstrated can meaningfully enhance portfolio risk-adjusted returns, particularly when broad market correlations break down. The category gained prominence after performing well during the 2008 financial crisis, spurring substantial asset growth and the creation of numerous new products following Morningstar's establishment of the managed-futures category in 2011.
However, Morningstar's review reveals significant structural problems limiting investor suitability. Among five major managed-futures funds representing approximately 70% of the category's aggregate assets under management, only one garners a Positive rating. The primary concerns center on three critical deficiencies: excessive fees relative to strategy complexity, insufficient transparency into portfolio construction and risk management, and unproven long-term track records for many products. While the category is showing incremental improvement in both transparency and pricing, Morningstar counsels a cautious approach to managed-futures investments at present, advising investors to resist performance-chasing behavior and conduct rigorous due diligence before committing capital.
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