Among those strategies are trend following, counter trends, arbitrage and global macro. According to Altegris Advisors LLC, a La Jolla, Calif.-based investment advisor that specializes in alternative investments, trend following has traditionally dominated the managed futures space.
Its Altegris 40 index tracks the performance of 40 CTA programs, or less than 7% of the total number of CTAs who report their performance. Trend followers typically make up 75% of the index, with the rest being specialized managers.
Simply put, trend followers seek to take advantage of discernible investment trends––either up or down––in whatever assets they’re following. And they generally do so by employing systemic, rules-based models.
That’s worked well in years marked by sustainable market trends, such as 2008. That year also spotlighted the ability of managed futures to deliver “crisis alpha”––i.e., managed futures tend to do well when traditional stocks and bonds go kaput.
But global markets in the years since the crash have risen––and fallen––in a choppy, risk-on/risk-off environment marked by a high correlation among asset classes. That means fewer long-running, independent trends that trend following managed futures strategies can depend on.
After the Altegris 40 index gained 15.47% in 2008, it lost 7.98% in 2009, gained 11.33% the following year, and declined in each of the next two years with losses of 3.32% and 4.75%, respectively.
“Managed futures did well as a group in 2008, and everyone jumped on board in 2009,” Cunningham says. “Now we’ve been in a 24-month drawdown and they look at the indexes and they say it no longer works. But people aren’t looking at what strategies have worked within managed futures and what haven’t.”
He adds there’s a high dispersion of performance among ’40 Act managed futures fund managers. “The difference between the top quartile and bottom quartile among large-cap value funds in 2012 was 4.8%,” Cunningham says. “The difference between the two groups in the managed futures space was 15%.”
Counter Trend Is Your Friend, Too
As a group, the ’40 Act open-end managed futures funds tracked by Morningstar have produced average negative returns during the past one-, three- and five-year periods (granted, not many funds have been around for five years).
The 361 Managed Futures Strategy Fund has been one of the best performers among ’40 Act funds since its December 2011 launch. Morningstar named it the top performing fund in its category for the 12-month period ended June 30 with an 8.12% return for its institutional share class, which has a net expense ratio of 2.15%. (The Class A shares have a 5.75% load and a 2.4% expense ratio, along with a $2,500 investment minimum.)
The 361 Managed Futures Strategy Fund follows a counter-trend strategy using futures contracts based on U.S. equity indexes. Its M.O. is straightforward: Look to sell short-term, overbought levels and buy short-term, oversold levels when investors overreact to market news.
“Counter-trend strategies work by going against the tide,” Cunningham says. “We’re taking advantage of behavioral finance and the fact that investors make bad decisions. Our inputs are all quantitative, but it’s simply price, volume and the performance of an index.”
The fund’s fee structure seems high at first glance, but is in line with the overall group. According to Morningstar, the asset-weighted average fee for the managed futures funds it tracks is 2.3%.
“If you produce alpha, people will pay for it,” Cunningham says. That seems to be the case with the 361 fund, which recently passed $250 million in assets.
Various Fees
Like many alternative investment vehicles, managed futures strategies aren’t cheap. CTAs typically charge a 2% management fee, plus a 20% performance fee based on any new profits. And annual fees from introducing brokers, or from a manager of managers that oversees managed futures accounts for investors, can range from about 1% to 6%. All reported returns are net of fees.
On the ’40 Act fund side, fees vary based on how funds are structured. Some funds employ single-manager strategies; others use multi-manager strategies that blend returns from the underlying CTAs.