Alternatives of all stripes become a hard sell when equities and bonds are enjoying extended bull markets, but the high times for traditional asset classes might also be the right time for managed futures in client portfolios.
According to a panel discussion at the 2017 Inside Alternatives conference in Denver on Monday, managed futures have faced additional headwinds in gaining popularity as investors remain largely unaware and advisors are uninformed about the utility of the strategies.
Managed futures strategies use contracts like options, futures and swaps that are associated with markets or indicators. Managers access asset classes like equity indexes, commodities, currencies, fixed income and precious metals across various geographies to achieve a variety of goals.
The strategies are quite diverse, said Jerry Szilagyi, CEO of Catalyst Funds. “The asset class encompasses everything from a traditional commodities trading advisor, to quants, to a manager of managers, to a specialist who packages together single strategies and multiple strategies into mutual funds.”
Most managed futures strategies employ some sort of trend-following component to take advantage of bull market growth, said Szilagyi. Generally, managed futures strategies are intended to outperform during bear markets, and participate in some of the upside of bull markets.
Until recently, managed futures strategies were only accessible to institutions and a small sliver of the investing elite, but recent trends have opened them up to a larger cohort of investors and at lower prices.
The strategies tend to shine most when markets are down -- eight years of bull markets have not offered managed futures an opportunity to prove their value. Szilagyi noted that Monday marked an all-time record for the longest period of time since a 3 percent equity market decline.
“We haven’t had much of a crisis for managed futures to really perform and provide superior returns,” says Szilagyi. Prolonged low volatility has also worked against managed futures strategies, which typically try to provide a smoother ride to investors.
According to the panelists, monetary policy is the source of much of their pain, as accommodative central banks have provided support for equity valuations and created less volatile markets. Traditional asset classes and some alternatives became correlated, leaving managed futures strategies behind.
“It’s been an awful, terrible period for our asset class, which is flat and boring,” said Dr. Rufus Rankin, director of research of Equinox Institutional Asset Management. “Yet while we’ve been boring and frustrated, we’ve also been preserving capital and providing a return stream independent from anything else your clients are invested in.”