Not so Trendy: The Struggles of Managed Futures

As pointed out in a recent article by Bloomberg, trend following funds are having a rough go of it. The article states that “…by some measures, commodity trading advisers are on track to post the worst yearly return since 1987, when data were first collected on the group.” While equities have provided some trends on which to hitch their wagons, fixed income, commodities and currencies have all been more choppy, making it difficult for managers to generate gains. This is a continuation of what we witnessed in 2016.

In fact, back in April, we dissected trend following performance in a blog post entitled “Deconstructing Managed Futures Returns” and found that, “What becomes immediately apparent upon examining the returns, is that 2016 was quite a difficult environment, with virtually none of the major asset classes exhibiting profitable trends. Further, it’s been a number of years since trends have broadly been exploitable…”

Within the mutual fund space, where we operate, of the 45 funds that makeup Morningstar’s Managed Futures category, only 13 have generated positive returns on a year-to-date basis through July 11th (our two counter trend funds are happily among those). Further, according to Morningstar, the category returns have been dismal over the past couple of years, with the trailing 1-year coming in at -8.4% and the trailing 2-year registering -2.70%. Given that, it’s understandable that investors are beginning to lose patience. But in a properly diversified portfolio there will almost always be something that isn’t performing well. After all, to protect against the material risks that equities expose investors to, assets that have low or negative correlations to equities must be included in the mix, which means that when equities are advancing month after month, those diversifying assets will disappoint when viewed simplistically, on a standalone basis.

The question that investors need to be asking themselves at this point is, why did I initially add managed futures to my portfolio? Was it to provide crisis alpha? (This is the subject of our webinar on July 13th, by the way.) Was it to improve upon the paltry returns offered today by investment grade debt without taking on additional equity risk? Was it simply to add an asset that has an attractive risk-adjusted return profile that is uncorrelated to stocks and bonds? Responding in the affirmative to any of these questions would strongly suggest that existing exposures to managed futures should be maintained or that new positions should be initiated. Additionally, for those invested in trend following approaches, we’d suggest taking a look at how they pair with the short term counter trend strategies that we manage. We think you’ll find them to be quite complementary.

Read our related blog, Deconstructing Managed Futures Returns