Managed futures funds

dharm999

Interesting article link, below, on Monevator today about Managed Futures funds, and how they are one of the few things that has not gone down recently.  I’ve looked at them, and can’t get my head around what they invest in and how they work.  Do they have a place in a diversified portfolio, alongside bonds, cash, and equities?

https://insights.factorresearch.com/research-defensive-diversifying-strategies-in-ytd-2022/

Morningstar has 109 funds in its Systematic Trend Other category, which includes Managed futures funds.  Historically, last 10 years, they haven’t had a great performance, but are doing well this year.

Just trying to work out if I should seriously look at these and have a small % of my overall money in them.

Eyeful

Have you not answered your own question. Do not invest in what you do not understand!

I have not looked into them myself. However, I would not be in the least surprised, to find out they are another high cost, hard to follow fancy bit of financial engineering.which will enrich those that run the funds, at the cost of those that invest in the funds. I myself will stay away.

Albermarle

Easier ( and more understandable) to just stick with the usual Wealth Preservation funds, like Capital Gearing etc , which are only down around 2 to 3 % over the same time frame.

bd10

I'd say trend following as asset class could be interesting. Theoretically, these strategies are akin to strangles in options, i.e. participating when prices are rising or falling outside a choppy non-trending range. One would de facto be also long volatility, added bonus when they short stuff.

I looked into a few futures fund, but while theory sounds all good, the lack of transparency turns me off. I do appreciate that none of those systematic funds want to give their game away, but if I cannot even find out trivial things such as what asset class, or what products they trade, and all I get is a cumulative PnL chart over time and this is it? No thanks.

The way I see CTAs/managed futures funds: If I had an institutional mandate, sure I'd invite these guys over but for them to get any of my biz, they have to disclose a lot more. As small retail client, if I'd so inclined to allocate risk capital to a black box, sure why not. But to be honest, bit of trend following in the odd market, I can do that too (ETFs or futures), don't need them for that. At least I'd know my system.

dharm999

Albermarle said:

Easier ( and more understandable) to just stick with the usual Wealth Preservation funds, like Capital Gearing etc , which are only down around 2 to 3 % over the same time frame.

We already have around 7% of overall money in these, took the fortunate decision to put money into Ruffer and Capital Gearing just over a year ago, luck rather than real judgement.  That combined with cash, REITs and cash, comes to around 40% of total funds.  Most of the rest is in low cost trackers.  Overall down around 4%, so not bad really.  Plan to stop full time work within the next 2 years, so am thinking about the best way to invest for the next few years

dharm999

Eyeful said:

Have you not answered your own question. Do not invest in what you do not understand!

I have not looked into them myself. However, I would not be in the least surprised, to find out they are another high cost, hard to follow fancy bit of financial engineering.which will enrich those that run the funds, at the cost of those that invest in the funds. I myself will stay away.

I agree about not investing in something I don’t understand, but am trying to understand and then decide if it’s worth investing or not.

dharm999

bd10 said:

I'd say trend following as asset class could be interesting. Theoretically, these strategies are akin to strangles in options, i.e. participating when prices are rising or falling outside a choppy non-trending range. One would de facto be also long volatility, added bonus when they short stuff.

I looked into a few futures fund, but while theory sounds all good, the lack of transparency turns me off. I do appreciate that none of those systematic funds want to give their game away, but if I cannot even find out trivial things such as what asset class, or what products they trade, and all I get is a cumulative PnL chart over time and this is it? No thanks.

The way I see CTAs/managed futures funds: If I had an institutional mandate, sure I'd invite these guys over but for them to get any of my biz, they have to disclose a lot more. As small retail client, if I'd so inclined to allocate risk capital to a black box, sure why not. But to be honest, bit of trend following in the odd market, I can do that too (ETFs or futures), don't need them for that. At least I'd know my system.

I agree that the few I’ve looked at opaque; long on this, short on that, heavily geared, and so on.  Trying to work out if putting in a few % for the next 2-3 years may be worth doing, if I can find one that is less opaque

Eyeful

dharm999 said:

Eyeful said:

Have you not answered your own question. Do not invest in what you do not understand!

I have not looked into them myself. However, I would not be in the least surprised, to find out they are another high cost, hard to follow fancy bit of financial engineering.which will enrich those that run the funds, at the cost of those that invest in the funds. I myself will stay away.

I agree about not investing in something I don’t understand, but am trying to understand and then decide if it’s worth investing or not.

You have taken a look at them and in your own words "can’t get my head around what they invest in and how they work".
 The very fact that managers have not explained in a simple way, what they are doing with their investors money suggests to me they either:-
(a) do not want the investors to understand because there is high risk involved.
(b) they do not fully understand themselves, what they are doing or the risks involved.
(c) hope to create a mystic around what they do, in order to charge large fees & become very wealthy.

Simply going by the title " Managed futures funds", my guess would be they are taking large bets on future contracts on the prices of things like gold, metals, oil, cotton, wheat, etc. If that is the case then they are just packaged ETC's.

george4064

Eyeful said:

dharm999 said:

Eyeful said:

Have you not answered your own question. Do not invest in what you do not understand!

I have not looked into them myself. However, I would not be in the least surprised, to find out they are another high cost, hard to follow fancy bit of financial engineering.which will enrich those that run the funds, at the cost of those that invest in the funds. I myself will stay away.

I agree about not investing in something I don’t understand, but am trying to understand and then decide if it’s worth investing or not.

You have taken a look at them and in your own words "can’t get my head around what they invest in and how they work".
 The very fact that managers have not explained in a simple way, what they are doing with their investors money suggests to me they either:-
(a) do not want the investors to understand because there is high risk involved.
(b) they do not fully understand themselves, what they are doing or the risks involved.
(c) hope to create a mystic around what they do, in order to charge large fees & become very wealthy.

Simply going by the title " Managed futures funds", my guess would be they are taking large bets on future contracts on the prices of things like gold, metals, oil, cotton, wheat, etc. If that is the case then they are just packaged ETC's.

Future contracts aren't exclusively for commodities, you can get contracts on all sorts such equity and bond indices, individual equities/bonds, currencies etc..

Malthusian

First rule of "diversifying": anything that goes up when markets are down can and will also go down when markets are up. And markets go up more often than they go down.

Hence when I hear the words "uncorrelated with equities" I reach for my revolver.

The article is a ramble through a bunch of boring stats, concluded with "2022 seems like the year of redemption for Managed Futures, which is benefitting from long positions on commodities like oil and short positions like JPY / USD. Let the trend be your friend, again." What does that mean? That I should follow the trend and buy oil and short JPY / USD? Or follow the much longer trend of Managed Futures funds losing money, by not buying them?

bd10

The thing about these managed futures funds I find odd is this: We've had an epic bull market in both equities and bonds for the past decade. Trend-following both (or either) would have been a piece of cake, yet the performance numbers of some funds I spotted was below average. Don't get that. Must be their mandate to stay clear of equities - i.e. esp the idea of being uncorrelated to equities. But if you have a trend in a market and you have a robust enough trend following system, surely you want to allocate capital in that market. I suspect plenty of these firms restricted themselves to commodities only, and in the run up to covid, these markets went nowhere. That could explain the poor past performance.

The cynic in me would speculate that we only have access to dog funds as opposed to institutional investors.

Can't prove either.

This brings me back to an earlier point about the opaqueness. If they don't really disclose which markets they play, how do we know whether (a) their system was rubbish trying to follow the bond and equities markets or (b) whether they had no mandate to play them to begin with.

As for uncorrelated with equities, that's a questionable proposition. There were some system funds that made a ton of money in Q1/2020 and also this year. They were trend-following and, well, they just went short the market. If it's a pure alpha play, then, I'd prefer established equities managers to pull that one off.