Why Have Managed Futures Strategies Underperformed Recently?

Why Have Managed Futures
Strategies Underperformed Recently?
Why Have Managed Futures Underperformed Recently?
Managed futures strategies have put in a stellar performance since their advent in early 1980s.
The chart below shows the outperformance of the managed futures industry as compared to the
S&P 500 since 1980.
(Managed Futures Index is the BarclayHedge BTOP 50 Index)
But, recent history has not been so good. After a stellar 2008, when the managed futures index
was up 13.5% and the S&P 500 dropped 38%, the managed futures index has lagged the S&P
500.
Managed
Futures S&P 500
2008 13.58% -38.28%
2009 -4.76% 23.49%
2010
6.40% 12.84%
2011 -4.25% -0.20%
2012 -1.87% 12.98%
Source: Yahoo Finance, BarclayHedge BTOP 50 Index
This is especially disconcerting because we have seen a whole slew of managed futures mutual
funds recently hit the market that are being sold to retail investors. Investors are concerned that
the strategy has lost its charm.
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Why Have Managed Futures
Strategies Underperformed Recently?
In this analysis we will show:
1. Long-term volatility has not dropped, but curve inversion has increased.
2. Most managed futures strategies have long-term holding periods.
3. Why there has been a drop in performance.
4. Investors should look at shorter holding period strategies like the MAMF Index.
Volatility Has Not Dropped, But the Returns Have
For our analysis, we created an index that contains commodities that represents most of the
commonly traded managed futures strategies. The index contains S&P500, Gold, Soybeans,
WTI, 10 Year Treasuries and the US Dollar Index. Then we looked at the cumulative absolute
move in this index, broken out by time frame, i.e. daily, weekly, monthly, quarterly and annual
moves.
Daily Weekly Monthly Quarterly
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
AVERAGE
1990-2000
2001-2005
2006-2012
195%
149%
163%
168%
142%
201%
218%
222%
228%
234%
233%
235%
232%
247%
214%
222%
228%
427%
316%
222%
255%
217%
84%
65%
76%
79%
67%
94%
103%
107%
113%
106%
106%
99%
109%
113%
102%
103%
104%
203%
141%
109%
117%
91%
38%
30%
37%
35%
31%
48%
47%
49%
52%
56%
42%
49%
52%
59%
48%
41%
52%
93%
62%
58%
59%
49%
Managed Futures
Annual
Returns
26%
19%
24%
22%
23%
31%
30%
29%
30%
28%
29%
26%
25%
38%
21%
27%
32%
61%
37%
36%
28%
25%
13%
6%
17%
14%
19%
15%
16%
17%
20%
8%
12%
23%
14%
15%
12%
17%
23%
26%
17%
18%
6%
11%
14.68%
2.55%
13.41%
-0.18%
14.02%
12.85%
11.96%
12.39%
1.63%
6.61%
3.85%
13.67%
15.52%
0.87%
2.40%
5.59%
7.58%
13.58%
-4.76%
6.40%
-4.25%
-1.87%
Daily Weekly Monthly Quarterly
192%
89%
42%
26%
232%
106%
50%
28%
270%
124%
59%
35%
Annual
15%
15%
17%
Returns
9.0%
7.3%
3.2%
(Managed Futures Returns are for the BarclayHedge BTOP 50 Index)
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Why Have Managed Futures
Strategies Underperformed Recently?
Cumulative absolute move is simply adding all the moves in the index over the specific time
frame. So, a 195% move in the daily index in 1991 means that the sum of the entire daily
moves in the index in 1991 was 195%.
For absolute return strategies that look to make money from both up and down moves, it is best
to look at cumulative moves to assess the strength of the market environment for that strategy.
1. The first conclusion that can be drawn from the above results is that the performance
has dropped, from an average of 9.0% per annum from 1990-2000, down to 3.2% from
2006 to 2012.
2. The second conclusion is that the total move in the index has not dropped, but increased
across all time frames. Therefore, the explanation often given by managers that a drop
in volatility is hurting performance is not borne out by the data as a whole.
Index Constituents Have Long Term Holding Periods
Next we looked at the correlation of the cumulative index moves to the managed futures returns
by time period.
Correlation of market moves by time frame to the managed futures index returns.
CORRELATION
Daily Weekly Monthly Quarterly Annual
1990-2000
-1%
-4%
-1%
34%
29%
2001-2005
2%
-29%
-8%
-40%
58%
2006-2012
37%
46%
44%
65%
82%
This correlation matrix has two clear trends:
1. The correlation of the annual moves is the highest to the managed futures returns,
showing that the most of the strategies in the index have long holding periods and are
influenced the most by long-term market indicators.
2. This correlation has increased over time. The correlation of the annual moves in the
index to the managed futures returns has gone from 29% in 1990-2000 to 82% over
the last 6 years. This can be attributed to a proliferation of long-term trend following
and momentum driven strategies in the managed futures index.
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Why Have Managed Futures
Strategies Underperformed Recently?
Short-Term Moves in the Index Have Increased More than Long-Term Moves (Volatility
Curve Inversion)
The table below shows the ratio of annual moves to quarterly and monthly moves in the index.
This once again has a clear trend:
Annual / Q Annual / M
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
AVERAGE
1990-2000
2001-2005
2006-2012
51%
31%
71%
65%
83%
47%
52%
57%
68%
30%
40%
87%
58%
39%
57%
60%
71%
42%
47%
51%
23%
46%
56%
56%
49%
Managed Futures
Returns
35%
20%
47%
41%
62%
30%
34%
34%
39%
15%
27%
47%
28%
26%
25%
40%
44%
28%
28%
32%
11%
23%
14.68%
2.55%
13.41%
-0.18%
14.02%
12.85%
11.96%
12.39%
1.63%
6.61%
3.85%
13.67%
15.52%
0.87%
2.40%
5.59%
7.58%
13.58%
-4.76%
6.40%
-4.25%
-1.87%
36%
30%
29%
Returns
9.0%
7.3%
3.2%
The curve is becoming more inverted over time. Meaning that the monthly and quarterly moves
have increased as compared to the annual moves.
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Why Have Managed Futures
Strategies Underperformed Recently?
This is the best explanation for why the managed futures index has underperformed in
recent years. We have already recognized the fact that most of the strategies in the managed
futures index are trend following type strategies with long-term holding periods.
But another thing to keep in mind is that most of these long-term holding period strategies have
risk management that is tied to shorter-term market moves.
As an example, a long-term trend following strategy might get its buy and sell signals based on
the 200 day moving average, but may still stop out and move to cash if there is a short term
adverse move in the underlying market. Therefore, as the size of the short term moves has
increased, the long-term trend following strategies have most likely hit their stop losses and
gone to cash quite often in recent times. But given the lower annual moves in the index, these
strategies have not been compensated while they have stayed in the market.
Therefore a drop in performance in the traditional long-term trend following strategies is
probably better explained by a relative pickup in the short-term volatility as compared to the
long-term moves in the market.
Solution - Access Shorter Holding Period Strategies
The important thing to understand is that just because the managed futures index has dropped
in performance does not mean that the managed futures industry as a whole has lost its charm.
The managed futures industry has grown beyond long-term trend following strategies into shortterm pattern recognition, volatility arbitrage and hybrid structures. These strategies are still few
in number and are not well represented in broad indices.
Also, they are not picked by most mutual funds that offer managed futures to the retail investor
which also explains the poor performance of the mutual funds in this space.
Short-term market volatility is high and is higher than it has been in the past. This is good for
strategies that trade often and have short holding periods. Also these strategies will not be
subject to being “chopped up” by short-term market moves, because they welcome short-term
market moves, given their short holding periods.
Here is an analysis of the MAMF Index that is a diverse index of 15 strategies. The index has:
■ Strategies across trend following, pattern recognition, arbitrage, neural networks and hybrid
structures.
■ Average holding period ranging between a few hours to a few days.
■ Dynamic allocation with monthly rebalancing across strategies ranging from 2.5% to 15%
capital per strategy.
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Why Have Managed Futures
Strategies Underperformed Recently?
Results
Managed
MAMF
Futures S&P 500
Index
2005
1.71%
3.01% 18.59%
2006
3.54% 13.74% 11.30%
2007
7.64%
3.24% 26.20%
2008 14.09% -38.28% 33.17%
2009 -0.10% 23.49% 13.29%
2010
7.05% 12.84% 15.52%
2011 -3.09% -0.20% 14.65%
2012 -1.35% 14.25%
6.24%
Source: Yahoo Finance, BarclayHedge BTOP 50 Index
■ The consequence of adding a diverse group of strategies that vary by holding period and style
results is a more consistent and superior performance when compared to the S&P500 or the
managed futures index.
CORRELATION Daily Weekly Monthly Quarterly Annual
2006-2012
64%
70%
71%
71%
72%
■ And the correlation to the market moves by time frame is consistent, which means that the
index is not dependent on any one time frame’s volatility and makes its performance more
robust across different market environments.
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Why Have Managed Futures
Strategies Underperformed Recently?
Important Disclosures
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Why Have Managed Futures
Strategies Underperformed Recently?
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