Can Managed Futures Offer Bear Market Protection


In the last few days I've found two articles (Barrons and Mutual Fund Observer) taking a negative stance on managed futures. This is a long/short strategy that typically uses some sort of 10 month or 200 day moving average/momentum/relative strength/trend following to go long or short various commodities, currencies, bond and even equities futures. I've seen funds that avoid crude oil altogether or will only go long crude but not short, There are several variations of the strategy out there.

I've been writing about the strategy for many years, specifically having used the Rydex Managed Futures Fund (RYMFX) as part of my defensive positioning for the previous bear market. It recently replaced "Rydex" with "Guggenheim" but kept the symbol. The track record of the strategy going back to previous decades was strong for the most part offering the ability to deliver positive returns almost all the time with little to no correlation to equities. It did not have a negative correlation necessarily, more like it just did its own thing and back then its own thing was that it went up most of the time.

I used RYMFX during the last bear market and the chart shows it was effective in terms of helping to smooth out the ride;

During the bull market it drifted lower earlier on in the bull, had solid returns in 2013 into 2014, then a rough period, then it did well in the back half of last year. As it struggled I often said it had become more of a bear market strategy and that I wouldn't expect it to do well as equities rocketed higher. My comments above about no correlation demonstrates that I have started to change my view that maybe it isn't a bear market strategy, maybe it never was a bear market strategy.

Being very interested in the strategy because it worked for me once, I take in any commentary on it I can find as I certainly would consider using it again. A couple of years ago I stumbled across something that theorized managed futures' past success being attributable to the strategy being mostly cash held to collateralize the futures contracts. Back in the 1980's, 90' and into the start of the financial crisis, cash regularly paid 4-5%, I had a money market in the mid 1980's for my college money that paid almost 10% for a time. Those seemingly massive yields have not existed for ten years now and so that is 400, 500, even 600 basis points not being earned in the strategy would seem to matter. RYMFX doesn't go back that far but talking generically, Investopedia says "between 1993 and 2002, managed futures had a compound average annual return of 6.9%" If, I say if, 500 of those basis points came from money market interest, then how much value is the actual strategy offering?

In a call for AdvisorShares a couple of years ago I asked a hedge fund expert about this and he dismissed the notion but it makes intuitive sense that losing out on all those basis points would be a big drag on the strategy. My inclination for now is to not plan on using managed futures as an across the board holding for defensive purposes. I say inclination because anything can change and there are quite a few funds in the space and I plan to try to study them further to see if I draw a different conclusion.

One of the great things about working in this business is the opportunity to always learn, what I know about managed futures has evolved and may evolve further.