There aren't many mutual funds that give investors access to managed futures, but the dearth of options isn't stopping some financial advisers from considering them.
There aren't many mutual funds that give investors access to managed futures, but the dearth of options isn't stopping some financial advisers from considering them.
Advisers think that managed futures make sense for investors who are nervous that commodities prices may start to decline, but don't yet want to get out of commodities altogether. They like the fact that managed futures are investment pools run by commodity-trading advisers who can go both long and short on futures contracts, because it gives them the ability to hedge their bets.
"If the market goes down, you can still make money," said Gregory Makowski, a principal at Totowa, N.J.-based CFS Investment Advisory Services LLC, which manages $630 million in client assets.
ASSETS SOAR
That is one reason he is considering putting some clients in the Rydex Managed Futures Strategy Fund from Rydex Investments of Rockville, Md.
Mr. Makowski isn't alone.
As commodities prices have in-creased, the fund has seen its assets soar to more than $800 million as of last Monday, from $275 million at the beginning of the year, according to Morningstar Inc. of Chicago.
The fund appears to be a good option for clients who don't want to invest in managed futures via a limited partnership, Mr. Makowski said.
"My only concern with these funds is that they all have hypothetical [long-term] track records," he said.
Advisers and industry experts said that the Rydex fund, launched in March 2007, and the $55 million Arrow Alternative Solutions Fund, launched last October by Arrow Investment Advisors LLC of Olney, Md., are the only two funds they're aware of that take a sizable position in managed futures via synthetic exposure.
That there aren't a lot of funds that give investors exposure to managed futures isn't surprising, said Ed Egilinsky, managing director of alternative investments at Rydex.
Most fund companies are focused on stocks and bonds, not alternative investments, he said.
But that appears to be changing as fund companies look for ways to generate alpha in a market where it is becoming increasingly hard to find, Mr. Egilinsky said.
So how does the Rydex fund generate alpha?
It follows the Standard & Poor's Diversified Trends Indicator, an investment model created in 1999 to capitalize on momentum in the commodities and financial futures markets.
The index is essentially an algorithmic formula designed to capture intermediate trends by analyzing the seven-month moving averages of 14 underlying commodity and currency categories and determining whether to go long or short on the categories.
One adviser who did use the fund has since gotten out because he thinks that even though it won't fall as hard as a long-only commodities fund, it will fall when commodities prices drop.
"We were afraid oil would spike up and come down, which it did," said Kathy Boyle, president of Chapin Hill Advisors Inc., a New York-based firm with $150 million under management.
Clients made "a nice profit" as a result of investments in the fund, she said. When and if market conditions change, Ms. Boyle said, she would have no problem using it again.
The fund's relative performance has suffered in the very short term.
For the 30-day period ended last Monday, it was down 4.45%, compared with the Standard & Poor's 500 stock index, which was down 4.39%, according to Morningstar.
Its year-to-date and one-year returns (2.73% and 9.03%, respectively), however, were still better than those of the S&P index (-14.19 and -17.87%).
DIFFERENT APPROACH
The Arrow fund takes a different approach to managed futures.
It doesn't just give investors exposure to managed futures. It also engages in long-short-equity and fixed-income-arbitrage strategies.
Managed futures account for just 30% of the fund's strategy, said Bill Flaig, chief investment officer for Arrow and manager of the fund.
The reason for the multistrategy approach, he said, is that Arrow thinks that a managed futures strategy is less useful to advisers alone than as part of a suite of alternative strategies.
"We've designed [the fund] to be an alternative core holding," Mr. Flaig said.
As a result, its performance differs from that of the Rydex fund. For the 30-day period ended last Monday, it was down 0.29%, and it had a year-to-date return of 0.39%, according to Morningstar. The fund has yet to build a one-year track record.
E-mail David Hoffman at dhoffman@investmentnews.com.
