Key Takeaways
- • Managed futures declined 6% from the S&P 500's March 9, 2009 low through end of August, even as the S&P 500 recovered almost 50% of lost ground over the same period, according to the source article.
- • Managed futures as a class gained 20% in 2008 while markets lost nearly 40%, making the strategy easier to sell last year.
- • Barclay Hedge data show managed futures since 1980 have a zero correlation with the S&P 500, 0.14 with U.S. bonds and 0.16 with global bonds.
- • Advisers recommend limiting managed futures to 5% to 10% of larger portfolios, while some argue for at least 20%, and experts say the strategy is unsuitable for portfolios under $100,000.
- • Managed futures funds often carry minimum investments of around $1,000, making them accessible to some retail investors according to Brian Kim of Liquid Capital Management.
Summary
Managed futures are becoming a harder sell for advisers after a strong 2008, according to a Money Management Executive article republished by Financial Planning. The strategy gained 20% in 2008 while markets lost nearly 40%, and it was one of the few investments to perform well that year, partly because it is not correlated with stocks and bonds. In 2009, however, the S&P 500 recovered almost 50% of its losses from a March 9 low by the end of August, while managed futures as a group fell 6% over the same period.
Raymond James adviser Philip Moses, who had moved a client's $1.5 million portfolio into a 20% alternatives allocation in 2007, said a 5% managed futures stake was the top performer when equities and debt declined in 2008. Moses said he is still opening managed futures accounts for clients. Chris Butler, vice president for alternative investments at Raymond James, said the products are doing what they are designed to do as non-correlating assets.
Brian Kim, president and chief investment officer of Liquid Capital Management, said most commodity trading advisers are trend followers who perform well in sustained trends but tend to underperform during reversals. He advised investors not to withdraw from a CTA after a poor quarter or buy in after a decline. Bob Franklin of Wells Fargo said advisers must explain that managed futures are long-term investments, noting monthly swings of plus or minus 10% are not unusual. Franklin said managed futures had only one down year from 1998 to 2008, at negative 1.9% in 1999, and posted annual gains in each of the six most severe market drops since 1980.
University of Pennsylvania finance professor Chris Geczy, academic director of the Wharton School's wealth management initiative, said managed futures add value to a portfolio because they are uncorrelated with equities and banks. He cautioned that the strategy does not suit smaller portfolios, particularly those under $100,000, and experts generally recommend a 5% to 10% allocation for larger portfolios. Morningstar hedge fund analyst Ben Alpert noted that mutual funds with managed futures strategies remain scarce, though more than $200 billion has been invested in the strategy. Neil Menard of Steben said high fees reflect the cost of trading futures and paying for manager talent.
Raymond James adviser Philip Moses, who had moved a client's $1.5 million portfolio into a 20% alternatives allocation in 2007, said a 5% managed futures stake was the top performer when equities and debt declined in 2008. Moses said he is still opening managed futures accounts for clients. Chris Butler, vice president for alternative investments at Raymond James, said the products are doing what they are designed to do as non-correlating assets.
Brian Kim, president and chief investment officer of Liquid Capital Management, said most commodity trading advisers are trend followers who perform well in sustained trends but tend to underperform during reversals. He advised investors not to withdraw from a CTA after a poor quarter or buy in after a decline. Bob Franklin of Wells Fargo said advisers must explain that managed futures are long-term investments, noting monthly swings of plus or minus 10% are not unusual. Franklin said managed futures had only one down year from 1998 to 2008, at negative 1.9% in 1999, and posted annual gains in each of the six most severe market drops since 1980.
University of Pennsylvania finance professor Chris Geczy, academic director of the Wharton School's wealth management initiative, said managed futures add value to a portfolio because they are uncorrelated with equities and banks. He cautioned that the strategy does not suit smaller portfolios, particularly those under $100,000, and experts generally recommend a 5% to 10% allocation for larger portfolios. Morningstar hedge fund analyst Ben Alpert noted that mutual funds with managed futures strategies remain scarce, though more than $200 billion has been invested in the strategy. Neil Menard of Steben said high fees reflect the cost of trading futures and paying for manager talent.
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