The Altegris Managed Futures Strategy Fund, which accesses an underlying pool of seven different CTAs, charges a 1.5% fund management fee, plus another roughly 1% fee for the underlying managers. In addition, each of the underlying managers charges performance fees ranging from 15% to 30% (Altegris says the average fee is about 20%), which kick in when the fund reaches net new highs during a given year.


When that happens, the fund essentially replicates the 2% and 20% structure of traditional CTA programs, and it means higher costs for investors. But it also means the fund made money and investors kept roughly 80% of the profits.

“Our view is that the managers we access for our fund have long-term expertise and track records in the space through multiple investment cycles,” says Matt Osborne, executive vice president of Altegris Advisors. “It’s hard to say how some of the newer single-manager funds with shorter track records will perform over the long term.”

The investor share class of the AQR Managed Futures Strategy Fund, on the other hand, charges a net expense ratio of 1.40%. The fund employs proprietary quantitative models to identify price trends in four asset classes: equities, fixed income, currencies and commodities. AQR doesn’t outsource any trading, which keeps costs down.

“Our fees alone give us a [performance] head start in the mutual fund space,” says Brian Hurst, principal and head of the global trading strategies group at AQR, an investment management firm in Greenwich, Conn.

As of July 10, the AQR Managed Futures Strategy Fund was up 4% year-to-date and had annualized returns of 1.6% since its January 2010 inception. The latter figure was hurt by a 6.6% loss in 2011.

Absolute Returns
The recent negative returns by many managed futures funds can be off-putting, particularly when viewed against the robust returns of the stock market since March 2009. But managed futures are designed as absolute return strategies that aim to mitigate volatility and achieve positive returns in all market environments by trading many different instruments––often targeting a positive return over cash.

“There are two main reasons why people invest in managed futures––to get a return premium above cash and to get diversification,” Hurst says. “It has delivered on the diversification aspect, but has delivered below average on the return aspect.”

But managed futures proponents stress that recent underperformance belies the category’s long-term positive results. Through June 2013, the compound annual return since 1980 on the Barclay CTA index was 10.55%. The index currently comprises 582 CTAs tracked by Barclay Hedge Ltd., a Fairfield, Iowa-based company that follows the managed futures and hedge fund industries.

And while managed futures are touted for their ability to go north when stocks and bonds go way, way south, they’ve generally produced positive returns even in good years for traditional markets. Since 1990, the Altegris 40 index has recorded negative returns just four times, and three of those four years have occurred since 2009.

Equally (if not more) important, managed futures’ long-term risk/return profile has been solid. During the 23-year history of the Altegris 40 index, the worst drawdown (the peak-to-valley loss relative to the peak for a stated time period) for the index was minus 15%, or far below those for U.S. and international equities, commodities and real estate investment trusts, where the worst drawdowns ranged from 51% to 68%. Only U.S. bonds (minus 5.15%) had a smaller worst-drawdown period.

Going forward, some managed futures strategists believe the eventual end of quantitative easing in the U.S. should lessen the risk-on/risk-off trade and create discernible trends in various asset classes. “Not many asset classes can potentially benefit from rising interest rates, but managed futures is one of them,” Osborne says.

Elsewhere, it’s expected that more funds will try to focus on shorter-term trends to mitigate the deleterious effect of choppy markets, and it’s likely that more funds will adopt counter-trend strategies.

Keeping The Faith
Financial advisors’ ardor for managed futures has dimmed recently, but some advisors still buy into the concept. “I believe they have a role in portfolios to provide a counter balance to equity risk,” says Jerry Verseput, founding principal at Veripax Financial Management in Folsom, Calif.

Verseput uses ’40 Act funds for his managed futures exposure, including the MutualHedge Frontier Legends and Longboard Managed Futures Strategy funds. He says he allocated roughly 10% of client portfolios to managed futures as recently as two years ago, but reduced that to 5% as managed futures struggled. But he sees better trends ahead for managed futures.

“I’m slowly throttling back up,” Verseput says.