As market volatility spikes and correlation between various asset classes breaks down, managed futures strategies are enjoying their day in the sun once again.
But whether financial advisers and investors will bite is an open question. The category has been in a funk since the 2008 financial crisis ended, when performance stalled after the strategies had generated returns in excess of 15% while just about every other asset class suffered double-digit losses.
Represented at the retail investor level by 51 mutual funds with nearly $15 billion in total assets under management, the category is suddenly thriving on the recent volatility, while
blaming the multiyear slump on various macroeconomic realities that are now starting to fall apart.
On paper, a strong argument can be made for why these trend-following strategies — that can go both long and short stocks, bonds, commodities and currencies — will thrive in an environment of market volatility, Fed tightening and commodity pricing that is more closely linked to fundamentals.
But although the performance numbers may look snazzy and the environment accommodating for managed futures, advisers need to take a much deeper dive. As with all liquid alternative strategies, performance can vary wildly and, particularly in the case of managed futures funds, the fees can be extreme.
In 2014, thanks largely to a spike in volatility in the fourth quarter, the category as tracked by Morningstar Inc. gained 9.1%, representing its first positive year since Morningstar created the category in 2011. The S&P 500 stock index, however, rose 13.7%.
On a 12-month-trailing basis through last Monday — which includes the early-January volatility spike — the category averaged a 12.8% gain. But the range of the performance making up that average is represented at the top by a 31% gain for the Altegris Futures Evolution Strategy (EVOIX) and at the bottom by a 5.4% decline for the Hatteras Managed Futures Strategy (HMFAX).
“It's safe to say, the jury is still out on managed futures mutual funds, because the space is relatively new,” said Matt Osborne, executive vice president and managing director at Altegris Advisors.
“We've really only had six months of good performance to make the differentiation,” he added. “As a category, I think we still have to prove ourselves, because a lot of investors are probably still licking their wounds from 2011 through 2013.”
Even though futures trading has a long history in the private and limited partnership space, the history in a mutual fund version is very short.
At the start of 2011, the category consisted of just 13 funds and $4.3 billion in total assets. But last year alone, investors pumped $3 billion more into the category, mostly during the final quarter when stocks bounced around like pinballs in a machine.
The
relatively strong performance last year, combined with a macroeconomic environment that generally favors the strategy, means more financial advisers are likely to find themselves sifting through funds in the category.
What they'll find is a little bit of everything, and it will require some serious due diligence, because these are far from your basic long-only stock funds.
“It can be like staring into a black hole,” said Morningstar fund analyst Jason Kephart in describing the hunt for the source of fees that can only be uncovered through a diligent prospectus search.
Mr. Kephart takes issue with what he believes are attempts by fund companies to disguise certain fees, including performance fees charged by subadvisers, who are hired by the fund manager to run portions of the fund.
“You have to look at the prospectus, and really read the fine print and the footnotes, where it can be described very vaguely,” he said. “If you're an investor or an adviser, you should have this information in a very transparent way.”
Mr. Kephart has identified at least 15 mutual funds in the category that include performance fees at the subadviser level, something he believes financial advisers would want to know.
“Technically, they're not charging the fund investors performance fees, but the fund's performance has been charged a performance fee,” he said.
Fund companies typically respond to such challenges by pointing out that the performance is always net of fees, and that paying performance fees to underlying managers is the only way to get access to some of the best managers.
“The [subadvisers] that are charging performance fees are getting them, and it behooves the investor to ask the manager of any fund what the ... fees are,” said Rufus Rankin, a portfolio manager at Equinox Fund Group, which has $1.5 billion under management in eight managed-futures-related funds.
The most straightforward type of a fund in the space is illustrated by the $424 million Pimco Trends Managed Futures Strategy (PQTIX), and the $7.2 billion AQR Managed Futures Strategy (AQMIX), both of which manage the portfolio assets in house and earn high marks for below-average fees of around 1.2%.
Performance-wise, the Pimco fund has a one-year return through Jan. 12 of 24%. The AQR fund, which happens to represent almost half the assets in the category, has a return of 14.4% over the same period.
Next, there are funds that employ a single subadviser to manage the underlying assets. Depending on the relationship, the subadviser could be a private partnership that charges a performance fee at the subadviser level.
The $153 million State Street/Ramius Managed Futures Strategy (RTSIX) is an example of a fund that employs a subadviser to manage the portfolio, which is reflected in the above-average fund expense of 4.01%.
The fund, which does not include a performance fee, gained 19.9% over the trailing 12-month period ended Jan. 12.
Then there are funds that use multiple subadvisers that typically charge both management and performance fees. Examples include the $498 million LoCorr Managed Futures Strategy (LFMIX) and the aforementioned $387 million Altegris Futures Evolution Strategy (EVOIX).
The Altegris fund has a posted expense of 1.7%, but the strategy paid additional management and performance to generate its 12-month net return of 31%.
The LoCorr fund, which also paid additional management and performance fees for a 12-month net return of 20.4%, has a posted expense of 1.83%.
Like most products in the
liquid alternatives space, this is not a simple plug-and-play category, where any above-average fund will suffice.
“It's not an either-or scenario,” said Ed Egilinsky, managing director of alternatives at Direxion Investments. “If somebody is going to use managed futures, they may want to use more than one manager,” he added.
The challenge, as always, is finding the right manager. But it doesn't help that the managed futures space is still a very long way from enabling simple and straightforward comparisons.
