Managed Futures Evolves

Can this new wrinkle in managed futures help in the next downturn?

All advisors get dozens of emails every day from fund companies and other sorts of management firms wanting to meet or otherwise pitch their strategy. Its a brutal business model although fortunately for the sales people, they have things like Constant Contact (or whatever is used now) that automates this process. Either way, if an advisor said yes to every pitch it would take up the entire work week.

I recently got one such email that was not automated that caught my eye. A new company close to me that is looking to put a different spin on managed futures. I used the Rydex Managed Futures Fund (RYMFX), which has since been rebranded to Guggenheim, during the financial crisis and I was pleased with the results. It went up for a little over a year after the peak in equities. Small exposures to products that provide the opportunity to go up when equities decline is a great way to mitigate the full brunt of large declines. There are no guarantees of course but managed futures has the historical tendency of a low to negative correlation to equities. The data was compelling enough back then that I bought the fund and held it through the bear market.

A few years ago I read some research about managed futures that suggested a big part of the long term return earned by the strategy came from the interest earned on cash held by the strategy, it's mostly cash or T-bills that secure the various futures contracts held long or short to position the fund. A yield of 3, 4 or 5% on cash is a whole lot more than zero or effectively zero (I realize the obviousness of that statement, I'm trying to be funny). If I have any apprehension about using RYMFX in the future, it is due to the likelihood that in the next bear market, cash yields will already be close to zero, so there's some number of hundred basis points the fund won't get.

The approach that the new firm mentioned above is taking is to blend managed futures with other asset classes to deliver a superior risk adjusted result over a longer period of time. I won't go into specifics as that is not my place until the fund actually launches (I will revisit it then) but I have come to learn about other funds that are generally in the same strategic neighborhood; multi-asset, multi-strategy funds that can use equities, managed futures and apparently fixed income. Another driver of seeking to blend managed futures with other asset classes is observed in RYMFX's performance. If managed futures is truly negatively correlated then it's going to go down most of the time which can make it difficult to hold it as a permanent allocation. A fund can't stay in business if everyone sells it when the stock market goes up. That doesn't mean the blend approach must be best but it is part of the story.

The chart looks at Catalyst/Millburn Hedge Strategy Fund (MBXIX), Grant Park Multi Alternative Strategies Fund (GPAIX), the Vanguard S&P 500 Index (VFINX) and RYMFX. For not being 100% equities, MBXIX and GPAIX have done well, they each have a lot of stars from Morningstar but of course they've not had to contend with a true bear market. They did deal with last December's panic, I would say they definitely muted the decline as captured in the hover.

Those results are especially good if you consider that the type of trend following employed by these funds is slower than such a fast decline. I just learned about these today so I don't know whether I think of them as true alternatives, low volatility equities proxies akin to SPLV or something else. One aspect of this blog is to share my process and part of my process is to learn about new (to me) funds/strategies for possible inclusion into client portfolio.

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