Most advisers got involved in managed futures after stocks performed poorly in 2008. But they walked right into another poor market environment, this time for managed futures themselves.
While they don't make the headlines as much, managed futures as an asset class are in crisis now, reminding many investors of the “generational low” terminology used by the stock folks circa 2009. The main managed-futures benchmark indexes are all close to five-year lows and sitting just above their worst drawdown levels in the past 15 years, at 38 months and -12.58%, respectively, from their past all-time highs.
But even though this period is the worst on record for the managed futures, the comparison with other asset classes is hardly a comparison at all, with managed futures losing about 12% from its highs, compared with roughly 50% for stocks and 65% for gold.
Despite the names on several managed futures products, they are not trying to provide the classic managed futures performance profile. Take 361 Capital's “Managed Futures Strategy,” which deserves credit for doing well in this poor period. But the strategy doesn't do trend following and isn't in commodities. Instead, it uses a counter-trend approach focusing on U.S. stock indexes only. There's nothing wrong with a different approach but investors need to know it isn't necessarily going to act like 'managed futures' when the next 2008-type market comes along.
Similarly, a recent review of the popular AQR Managed Futures Strategy reveals that 95% of the exposure was in financials, currencies and stock indexes. That's all well and good, and many of the largest managed futures programs have skewed their portfolios that way because of success in those markets recently, but investors need to know that it isn't going to necessarily act like 'managed futures' during a big sell off in oil, corn, copper or any similar 'in the ground'-type commodity.
EASIER ISN'T ALWAYS BETTER
While the mutual fund wrapper has made managed futures cheaper and easier to access, several of the so-called managed-futures mutual funds and exchange-traded funds don't actually provide access to managed-futures managers. Instead of the very complicated path of screening, hiring and allocating to actual managed-futures programs and managers — and having to pay them fees — many funds choose to use a single indicator to replicate managed futures performance at a low cost.
Despite big cost savings, the results have been rather disastrous, in at least one case, for those investors hoping to track the benchmark managed-futures indexes with a “managed-futures fund.”
These replication products can offer a lot of cost savings, but does it matter that you're saving 150 basis points if underperforming the benchmark by nearly 30%?
It costs money to operate a fund, go on road shows pitching advisers on the product, and wine and dine the custodians to get a fund listed and available on their platforms. So it should be no big surprise that the managed-futures investments put in front of advisers are from the biggest names with the most money to spend on the adviser channel.
The old saying the rich get richer has never been truer than in managed futures, where over 65% of the assets are controlled by just 3% of the managers (just 35 of them).
But while more assets may beget more asset raising, it doesn't necessarily mean more success. We looked at the BarclayHedge database and measured the average monthly return for all programs going back 20 years, finding a distinct pattern of returns falling as assets got larger.
There are several reasons for this, including the deleveraging of a program to attract more institutional assets, the inability to access less liquid commodity markets such as cotton or cocoa or platinum without hitting position limits, and the inevitable mental shift to protecting assets under management rather than growing them.
ACCESSING 'RIGHT-SIZED' MANAGERS
There are managed-futures programs in the $50 million to $1 billion under management range that have bucked the status quo since 2009 by making money while stocks have been rallying. These managers are 'right-sized,' remaining small and thus being able to access commodity markets like cotton and corn and large enough to maintain sophisticated operations and risk controls.
But a lot of these programs haven't been available to investment advisers and their clients because they exist only as managed accounts (which advisers can't access unless they are registered as futures professionals) or privately offered funds (which the managers don't have the scale or workforce to wholesale to the adviser channel). They typically don't have an interest in spending a lot of money to create and sustain a “liquid alts” mutual fund or ETF-type product.
Managed-account platforms are sometimes touted as a solution to this problem, offering one-investment access to a menu of programs. But there remains a steep learning curve and need for due diligence on the managers available, and most platforms still don't have access to the 'right-sized' managers (as the smaller managers may not wish or yet be able to pay to get onto the platform).
A better way of matching up those advisers who believe in the powerful diversification of managed futures with these 'right-sized' managers is needed.
GET MANAGED FUTURES DOING A BETTER JOB
With the stock market at all-time highs and interest rates still at historic lows, you're likely to start getting more of what you want from managed futures just by keeping your exposure to the space and benefiting from their crisis period performance profile.
But for those not content to just wait, a review of your managed-futures holdings could be in store: Are you with the largest managers, who have trouble accessing commodities? Are you in a low-cost replication strategy that is underperforming the index? Do you have access to “right-sized” managers via privately offered funds? These are all questions that need to be answered before a fair assessment can be made on whether managed futures are doing the job you hired them to do.
Jeff Malec is founder and CEO of Attain Capital Management.
