DIANE HARRISON Improving the Odds with Managed Futures

appeared on 3/19/14: http://allaboutalpha.com/blog/2014/03/19/improving-the-oddswith-managed-futures/

Improving the Odds with Managed Futures

With uncertainty dominating world news and subsequent market reactions, investors crave any means available to help them mitigate portfolio investment risk. The use of alternatives has long been accepted by sophisticated investors as a proven way to help reduce overall portfolio risk over market cycles. Managed futures have always been central to this option, particularly when sharp volatility spikes drag traditional market classes down together. Yet the asset class remains somewhat of a mystery to many investors. They question how managed futures can provide a port in the storm during choppy markets. They have been led to be skeptics based on a general tendency of the media to focus its coverage on trend followers downside performance during the fiscal intervention years of recent past, and to exhibit a lack of emphasis on the benefits managed futures offer to investors through diversification and non correlation. To achieve the benefits of managed futures, investors need to minimize the risks and do everything they can to improve their chances for success during difficult market conditions. Lets take a look at some of the basic benefits that this strategy provides in dampening the pain investors are all too familiar with these days. Managed futures have low correlation to stocks and bonds, mainly due to equal facility in up or down market cycles Able to achieve absolute returns: Commodity Trading Advisors (CTAs), the professionals who trade managed futures, are comfortable trading both long and short markets, increasing the potential to profit from market moves in either direction and creating potential for absolute returns. CTAs can deliver absolute returns by buying futures positions in anticipation of a rising market or selling futures positions if they anticipate a falling market. They can also employ options strategies with futures contracts that allow for profit potential in flat or neutral markets. Able to profit from rising or falling markets: Commodities markets often respond more strongly to supply and demand factors as primary drivers rather than macro factors such as a strong economy, credit conditions, or corporate profits. CTAs are also trading in highly liquid, well-regulated, exchange-traded instruments and foreign exchange markets, which allows for the portfolio to be marked-to-market daily. And unlike long-only commodity indices and commodity ETFs, which rely on the price of commodities rising, managed futures programs actively trade both sides of commodity price movements, allowing them to potentially perform whether commodity markets go up or down. Able to offer protective stance during prolonged or severe market declines: History shows that managed futures are often one of the best performing assets during bear markets and financial crises. The chart that follows illustrates both the non
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DIANE HARRISON Improving the Odds with Managed Futures

correlation and outperformance characteristics of managed futures during the past 25 years during the five largest market draw downs.

Managed futures offers participation across market categories and in the worlds largest and most liquid markets Market Diversification: Most managers trade across dozens or even hundreds of individual futures contracts to increase diversification. Due in part to its deep market penetration, the growth of managed futures has risen dramatically over the past decade:

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DIANE HARRISON Improving the Odds with Managed Futures

Dynamic asset allocation: Most CTAs allocate dynamically across multiple asset classes equities, commodities, fixed income, and currencies aiming to deploy capital where they perceive the strongest opportunity. The table below shows a representative sampling of some of the markets CTAs participate in:
NO TES & BONDS Aussie 10yr Bond Aussie 3yr Bond Canadian 10yr Bond German 5yr Bund German 10yr Bund German 2yr Schatz Japanese 10yr Bond UK Long Gilt US 10yr Note US 2yr Note US 5yr Note US T-Bond CURRENCIES Australian Dollar Brazilian Real British Pound Canadian Dollar Euro FX Japanese Yen Mexican Peso New Zealand Dollar South African Rand Swiss Franc US Dollar Index STOCK INDICES Australia SPI 200 Canada S&P 60 China (HK) Hang Seng EuroStoxx 50 France CAC 40 Germany DAX Index Japan Nikkei 225 Japan Topix Singapore MSCI S. Africa JSE Top 40 Sweden OMX Taiwan MSCI UK FTSE 100 US DJIA US NASDAQ US Russell 2000 US S&P 500 US S&P MidCap 400 SO FTS Cocoa Sugar Coffee Orange Juice RATE & BILLS Aussie Bank Bill Can. Bank Accept. Euribor Eurodollars Euroswiss Euroyen UK Short Sterling RATE & BILLS Aussie Bank Bill Can. Bank Accept. Euribor Eurodollars Euroswiss Euroyen UK Short Sterling P RECIOUS METALS Gold Silver Platinum Palladium

IND USTRIAL METALS Aluminum Copper Lead Nickel Tin Zinc

G RAINS Corn Milling Wheat Rapeseed Rough Rice Soybean Meal Soybean Oil Soybeans Wheat

LIVESTOCK & MEATS Feeder Cattle Live Cattle Lean Hogs

FIBERS Cotton

Rising Interest Rates: Managed futures are one of the few strategies that can produce positive returns in both rising and falling interest rate environments. Investing in managed futures that include commodities and foreign currency participation can offset a portfolios losses produced in equities and bonds when inflationary pressures impact stocks and bonds, resulting in underperformance. With 2014 likely to be a pivotal year for the direction of interest rates, managed futures should be a key focus for consideration in portfolio management.

Managed futures offer a variety of strategies in which to participate in the global markets In addition to the deep market penetration, highly liquid and well-regulated markets, and the ability to profit in rising and falling markets that CTAs can take advantage of in managed futures, there are additional ways for investors to diversify among the trading advisors who offer managed futures strategies. Several of the most popular include: trend following short-term trading sector specialists discretionary and global macro.
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DIANE HARRISON Improving the Odds with Managed Futures

Trend following: Managers in this category use quantitative systems and models to identify trends in financial and commodity markets. Most trend-following managers trade in over 30 different futures markets in all asset classes: equities, commodities, currencies, and fixed income. Trend followers historically have done well when stocks are down. In good times for managed futures overall, trend followers are often one of the best performing strategy groups. However, trend followers may experience large or sustained draw downs, and they typically have a relatively high correlation to one another. Short-term trading: In the short-term, markets often experience less trend behavior and more mean-reversion. Also, market segmentation across time zones, with markets opening and closing across the globe at different times, can lead to a rich set of opportunities in addition to trend. Short-term managers tend to trade in ten or more of the most liquid financial futures markets: equities, currencies, and fixed income. Most short-term CTAs employ counter-trend and mean reversion trading, with holding periods from inter-day to two weeks in duration. These CTAs historically have exhibited low draw downs and volatility with demonstrated low correlation to other managers and strategies in managed futures. Sector specialists: These managers offer focused participation with fundamental input in key markets or sectors (e.g. FX, fixed income, energy, stock indices, metals, etc.). They often show low correlation to other managers and strategies, potentially providing excellent diversification benefits. Discretionary and global macro: Often considered the broadest category of CTAs outside of trend followers, these managers analyze global factors and themes that are affecting the markets to formulate their strategy approach. They are well diversified across asset classes, conceptual investing themes, and trading time-horizons. They may offer superior return potential and attractive risk-adjusted returns. Managers typically rely on fundamental inputs which can be combined with technical analysis in this strategy. Discretionary and global macro CTAs traditionally exhibit low correlation to other CTAs as well. Managed futures can assist in taming the volatility that increasingly impacts the world markets Utilizing managed futures, particularly in a thoughtful and balanced way with a portfolio focusing on the three managed futures strategy groups that have a low correlation to trend following and to each other, can help investors improve their overall portfolio performance. Including managed futures within a portfolio can offer investors consistent returns, help to manage volatility, potentially constrain draw downs, and complement allocations to other assets. Its an asset class well worth devoting time to understanding today and for the long term.

Diane Harrison is principal and owner of Panegyric Marketing, a strategic marketing communications firm founded in 2002 and specializing in a wide range of writing services within the alternative assets sector. She has over 20 years of expertise in hedge fund marketing, investor relations, sales collateral, and a variety of thought leadership deliverables. In 2014, the firm was awarded IHFAs Innovative Marketing Firm of the Year for the second year in a row. In 2013, the firm was awarded IHFAs Innovative Marketing Firm of the Year, and AIs Marketing Communications Firm of the Year- US. A published author and speaker, Ms. Harrisons work has appeared in many industry publications, both in print and on-line. Contact: dharrison@panegyricmarketing.com or visit www.panegyricmarketing.com.

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