February 2019 • Marla Brill
While funeral homes, medical professionals and accident lawyers may seem to have little in common, their businesses all benefit from bad news. The same can be said for managed futures managers, a niche of the investment world that few people understand, and others ignore or avoid. Managed futures programs take long or short positions in futures contracts that usually cover four major asset classes: stocks, commodities, currencies and fixed income. Investors look for securities whose prices have risen or fallen, then take long or short positions to profit from what they hope will translate into longer-lasting pricing trends. Because these “momentum investors” use different methods for spotting and exploiting trends, their performances can vary widely. (For an explanation of the rationale behind momentum investing, see the box titled “The Human Side of Momentum Investing.”) While managed futures programs can work as long as markets are in a trending pattern, either up or down, they are best known for their buck-the-crowd performance in prolonged equity bear markets. During those times, the short equity positions of managed futures strategies, as well as their ability to place long or short bets on other asset classes, work to their advantage. The $682 million Altegris Futures Evolution Strategy Fund (EVOIX) emphasizes that point in a chart that shows the superior performance of a managed futures benchmark against the S&P 500 during 11 separate quarters of equity market stress since 2000. These include the third quarter of 2008, when Lehman Brothers went bankrupt, the S&P 500 fell 22%, and the managed futures benchmark gained 12.7%. It also includes the third quarter of 2001, which saw the terrorist attacks on the World Trade Center and Pentagon and when the S&P 500 fell 14.7% while managed futures gained 3.9%. In the third quarter of 2011, the S&P 500 fell 13.9% while managed futures gained 2.4% in a period that saw the Greek credit downgrade and European sovereign debt crisis. The problem for managed futures funds is that for most of the last several years the stock market has been on a fairly even keel, punctuated by short-term corrections and quick recoveries, and hasn’t demonstrated any of the longer-lasting trends that the managed futures funds thrive on. Commodities, currencies and fixed income have usually meandered or shown no clear direction. “Persistent trends are the lifeblood of managed futures,” says Matt Osborne, chief investment officer of Artivest—the New York and La Jolla, Calif.-based alternative investments firm that merged with Altegris in the summer of 2018. “We haven’t experienced that environment in quite a while. The magic bullet is when at least two of the four asset classes we invest in are consistently trending. Instead, there has been a lot of sideways activity recently.” The result has been disappointing performance for the group. The average fund in Morningstar’s managed futures category delivered a negative 1.22% annualized return over the three years ending December 31, 2018, and a 2.86% return over five years. The institutional class shares of the Altegris Futures Evolution Strategy, which is managed by three subadvisors Osborne selects and oversees, fell 0.12% over three years and saw a positive 5.39% return over five years. Brighter Days Ahead? Osborne believes that for managed futures investors, at least, brighter days could be on the horizon. Though he concedes they have underperformed in recent years, he also says “factors that have generally favored managed futures have also begun to strengthen recently. … These factors may signal a turning point for managed futures managers against a global and economic backdrop that more closely aligns with longer-term historical norms.” First « 1 2 3 » Next
While funeral homes, medical professionals and accident lawyers may seem to have little in common, their businesses all benefit from bad news. The same can be said for managed futures managers, a niche of the investment world that few people understand, and others ignore or avoid.
Managed futures programs take long or short positions in futures contracts that usually cover four major asset classes: stocks, commodities, currencies and fixed income. Investors look for securities whose prices have risen or fallen, then take long or short positions to profit from what they hope will translate into longer-lasting pricing trends. Because these “momentum investors” use different methods for spotting and exploiting trends, their performances can vary widely. (For an explanation of the rationale behind momentum investing, see the box titled “The Human Side of Momentum Investing.”)
While managed futures programs can work as long as markets are in a trending pattern, either up or down, they are best known for their buck-the-crowd performance in prolonged equity bear markets. During those times, the short equity positions of managed futures strategies, as well as their ability to place long or short bets on other asset classes, work to their advantage.
The $682 million Altegris Futures Evolution Strategy Fund (EVOIX) emphasizes that point in a chart that shows the superior performance of a managed futures benchmark against the S&P 500 during 11 separate quarters of equity market stress since 2000. These include the third quarter of 2008, when Lehman Brothers went bankrupt, the S&P 500 fell 22%, and the managed futures benchmark gained 12.7%. It also includes the third quarter of 2001, which saw the terrorist attacks on the World Trade Center and Pentagon and when the S&P 500 fell 14.7% while managed futures gained 3.9%. In the third quarter of 2011, the S&P 500 fell 13.9% while managed futures gained 2.4% in a period that saw the Greek credit downgrade and European sovereign debt crisis.
The problem for managed futures funds is that for most of the last several years the stock market has been on a fairly even keel, punctuated by short-term corrections and quick recoveries, and hasn’t demonstrated any of the longer-lasting trends that the managed futures funds thrive on. Commodities, currencies and fixed income have usually meandered or shown no clear direction.
“Persistent trends are the lifeblood of managed futures,” says Matt Osborne, chief investment officer of Artivest—the New York and La Jolla, Calif.-based alternative investments firm that merged with Altegris in the summer of 2018. “We haven’t experienced that environment in quite a while. The magic bullet is when at least two of the four asset classes we invest in are consistently trending. Instead, there has been a lot of sideways activity recently.”
The result has been disappointing performance for the group. The average fund in Morningstar’s managed futures category delivered a negative 1.22% annualized return over the three years ending December 31, 2018, and a 2.86% return over five years. The institutional class shares of the Altegris Futures Evolution Strategy, which is managed by three subadvisors Osborne selects and oversees, fell 0.12% over three years and saw a positive 5.39% return over five years.
Brighter Days Ahead?
Osborne believes that for managed futures investors, at least, brighter days could be on the horizon. Though he concedes they have underperformed in recent years, he also says “factors that have generally favored managed futures have also begun to strengthen recently. … These factors may signal a turning point for managed futures managers against a global and economic backdrop that more closely aligns with longer-term historical norms.”
Please log back in before proceeding.
There was an error logging in. Please try again.
Congrats! You are now logged in. Your exam is being submitted.