The pain and suffering spreading across the global financial markets has translated into a bonanza of opportunities for the relatively obscure corner of the alternatives space known as the managed-futures industry.
The pain and suffering spreading across the global financial markets has translated into a bonanza of opportunities for the relatively obscure corner of the alternatives space known as the managed-futures industry.
The $230 billion industry, which is sometimes viewed as the oddball cousin to the $1.7 trillion hedge fund industry, has become more appealing recently because of its ability to generate positive returns in a market that appears to take no prisoners.
Through the end of last month, for example, while the Standard & Poor's 500 stock index was down 32.9% from the start of the year, the average managed-futures fund was up 16.1%, according to the Greenwich Hedge Fund Index.
During that same period, the average hedge fund was down 14.3%, according to Stamford, Conn.-based Greenwich Alternative Investments.
Across the hedge fund universe, only strategies dedicated to short-selling have done better than managed futures this year.
The stellar performance of managed-futures funds, also known as commodity trading advisers, isn't surprising for the typically quantitative strategies that are designed to exploit extreme market movements, according to industry watchers.
What makes the environment so opportunistic for futures traders is that extreme trends have hit virtually every segment of the financial markets, from stocks to currencies to commodities to interest rates.
For example, as investors started bailing out of the stock market in September in a flight to quality, the systematic models used by futures traders pointed toward a rally for U.S. Treasuries and the German Bund, which is equivalent to the 10-year U.S. Treasury bond.
While building up long positions in securities likely to benefit from the flight to quality, traders also started shorting equity index futures to tap into the negative investor sentiment for stocks.
"CTAs seek to profit when the market is done trading in a range and will move from Point A to Point B for macro reasons that will usually take the market by surprise," said Ernest Jaffarian, founder and chief executive of Efficient Capital Management LLC, a Naperville, Ill.-based commodities pool operator with $1.2 billion under management.
His model portfolio, which combines multiple underlying CTAs, was up 23.3% this year through last month.
"The breadth and magnitude of this financial event could last for several months," Mr. Jaffarian said. "[The use of managed futures] is a strategy that tends to perform best when that performance is most needed."
Futures fund managers are capable of going long or short more than 70 different instruments pegged to everything from coffee and orange juice to equity indexes, precious metals and global currencies.
"There are times when you have a confluence of events where you see a lot of trending markets, and this is one of those times," said Sol Waksman, president of BarclayHedge Ltd. in Fairfield, Iowa.
Beyond the performance averages, the market conditions have produced some extreme examples of how managed futures funds can capitalize on an abundance of market trends.
The flagship strategy at Drury Capital Inc. gained 23.5% in October and has gained 56.9% since the start of the year.
"A solidly trending market is good for us, and the markets have definitely been there for us this year," said Tom Bruno, director of research at Drury, a Princeton, N.J.-based firm with $160 million under management.
It's a similar story at Florham Park, N. J.-based Hyman Beck & Co. Inc., where the firm's model portfolio gained 16% in October for a year-to-date gain of 46% through the end of last month.
"If our year ended right now, this would be the best performance in our 17-year history," said Jim Lubin, president of Hyman Beck, which manages $500 million.
"Futures funds have historically done very well in periods of financial stress, and right now is the equivalent of a perfect storm of financial stress," he added.
In 2002, the year following the September 2001 terrorist attacks, hedge funds were essentially flat, the S&P lost more than 23.4%, and managed futures funds gained 18%.
The trick for the managed futures industry is to get investors to take notice and then to consider an allocation to the asset class even when the equity markets start regaining some ground.
"The investment culture in this country is still focused primarily on stocks and bonds, and when stocks are up 10%, it's hard to get brokers and advisers to allocate to an alternative asset class," said Paul Wigdor, managing director at Superfund USA Inc. in New York.
Superfund has $105 million under management, divided between two strategies. The Quadriga Superfund L.P. Series A is up 26.5% this year through October, while the more aggressive B series is up 39% over the same period.
"Right now we're starting to see people who understand the need to diversify beyond stocks and bonds," Mr. Wigdor said. "Our goal is to make this as available to retail investors as possible."
Along those lines, the industry is also likely to try and distinguish itself from the broader hedge fund industry, which has been suffering right along with the equity markets this year.
"Most alternative investments are just a different way of investing in equities, while managed futures offers a whole different kind of investment realm," said Patrick Welton, chief executive at Welton Investment Management Corp. in Carmel, Calif.
The firm manages $500 million, and its flagship managed futures strategy gained 12.5% this year through October.
"Advisers need diversification, and most of their clients' portfolios are still predominantly invested in beta of the stock market that's tied to the health of the local economy," Mr. Welton said.
E-mail Jeff Benjamin at jbenjamin@investmentnews.com.
