In a tough year for stocks and bonds, mutual funds that follow an investment approach that has capitalized on both the bear market for bonds and the bull market for commodities are delivering excellent returns.
The so-called managed futures funds follow the maxim that “the trend is your friend”. They implement trend-following strategies in the futures markets, using quantitative models to take long and short positions in four major asset classes around the world: stocks, bonds, commodities and currencies.
“Trend following can be simply described as going long markets that are rising in price and shorting markets that are falling in price,” managers at AQR, which runs the
AQR Managed Futures Strategy
background (ticker: AQMNX), have written.
The funds give investors who tend to focus on stocks and bonds a way to gain exposure to more than 100 different futures markets, including relatively obscure markets like European natural gas and Eastern European interest rates.
Managed futures funds returned an average of 16% in 2022 through May 20, according to Morningstar, and are serving their purpose of offering diversification benefits when stock markets struggle.
The 2,500 million dollars of Natixis
AlphaSimplex Managed Futures Strategy
fund (ASFYX) is up 29%, and the
Pimco Managed Futures Strategy
(PQTAX), the largest of the group with 3.2 billion dollars, has gained 15%.
These are some of the highest returns in the mutual fund industry. the
S&P 500 Index
has fallen 16% this year, and the
iShares Top US Aggregate Bonus
the exchange-traded fund (AGG) is down 9%.
|Background/Ticker||Total return to date||3 years trotal return||5 years trotal return||Total assets (bil)|
|Pimco/PQTAX Managed Futures Strategy||15.2%||13.3%||9.2%||$3.2|
|American Beacon AHL/AHLYX Managed Futures Strategy||13.3||9.6||7.5||3.2|
|AlphaSimplex/ASFYX Managed Futures Strategy||29.2||16.2||9.2||2.5|
|Abby Capital/ABYIX Futures Strategy||14.4||10.1||6.2||2.2|
|LoCorr/LFMAX macro strategies||13.9||9.3||5.8||2.0|
|AQR/AQMNX Managed Futures Strategy||26.3||7.2||3.4||1.4|
|S&P 500 Index||-16.1%||14.0%||12.6%||—|
|IShares Core US Aggregate Bond ETF/AGG||-9.3||0||1.1||—|
Note: Data as of 05/23/22; three-year and five-year total returns are annualized.
Sources: Morningstar; set of facts
Most investors do not short stocks or bonds or participate in commodity markets. Managed futures funds offer a disciplined way to gain that exposure. The funds perform best when there are strong trends to exploit, including this year’s slide in global bond markets, a rise in commodity prices and a gain in the dollar. However, choppy markets can lead to negative returns.
“When markets go from good to great or bad to worse, that’s when these strategies tend to shine,” says Yao Hua Ooi, who co-manages the AQR Managed Futures Strategy fund, up 26% year-to-date.
“The strategy keeps winners long and stops losers quickly, so losses tend to be smaller,” says Matt Dorsten, manager of the Pimco fund.
Dorsten says the Pimco fund has been negatively correlated with the S&P 500, supporting the diversification argument.
This year’s ample gains in managed futures funds follow a multi-year period of mixed returns. Except for the Natixis fund, the funds’ performance has lagged the S&P 500 for the past three years, and all have lagged the index for five years. But they are comfortably ahead of the bond market.
Managed futures funds have around $18 billion. They are among the largest liquid alternatives funds, seeking to offer individual investors access to strategies long practiced by institutions, including long/short capital. Commodity trading advisors have used trend following strategies for decades.
If the stock and bond markets are in a period of volatile performance much like the 1970s, trend-following strategies may continue to find markets to exploit. “We can change positions over time and adapt to different opportunities in a macro environment with higher inflation than most investors have seen in 40 years,” says Katy Kaminski, fund manager at AlphaSimplex Managed Futures. “The game is changing and what works is different. Most investors are predisposed to invest in long stocks. That usually works, but sometimes it doesn’t.”
Kaminski says the fund did well in early 2020 when equity markets took a hit. They were long bonds and short oil and other commodities after the Covid pandemic hit, the opposite of recent positioning.
Simon Scott, director of global alternative ratings at Morningstar, says the funds hit a “sweet spot” this year as commodities rose and bonds sank. Equity markets, although down around the world, have not contributed much to the fund’s performance because movements have been choppier.
As for the benefits of diversification, Scott says, “There’s nothing in the structure that says they’ll go up when stock markets go down. A lot of people think there’s some kind of magic lever that they pull.”
Additionally, annual fees are relatively high, averaging 1.75%, due to the technology and staff required to implement the strategy.
Some trends that the funds exploited this year in bonds, commodities and currencies have recently reversed. But strong fund returns have bolstered the case for diversification.
The idea behind managed futures funds was championed more than two centuries ago by British economist David Ricardo, who is believed to have said, “Cut your losses, let your profits run.” It seems as relevant today as it was in the 19th century.
write to Andrew Bary at firstname.lastname@example.org