Futures Funds Hitting The Fences

Take a look at Chart 1. Does it make you think of anything? How about baseball? Recall the words of Yankee great and master of malaprops Yogi Berra: “When you come to a fork in the road, take it.” Looking at the fork here, Yogi could very well have been proffering advice to futures fund investors this year. 

The chart contrasts the 12-month performance of two different futures investing strategies: active management versus long-only buy-and-hold.

Investors taking the managed futures fork are a much happier lot than those opting for passive strategies. Why? The price of crude oil, a hefty component of most commodity futures benchmarks, has been nearly halved since last year’s Independence Day. Agricultural futures, heavily represented in the equal-weighted Thomson Reuters/CoreCommodity CRB Index, are down nearly 20 percent. Futures funds unconstrained by long-only mandates were free to short the oil and ag markets; funds tracking indexes like the CRB were obliged to be bulls all the way down.

No surprise, then, that managed futures (the actively managed futures portfolios) top this year’s list of hedge fund strategies. The Credit Suisse Managed Futures Liquid Index is up 11 percent through the first week in April, beating long/short, event-driven, global macro and merger arbitrage strategies by substantial margins.

The Credit Suisse benchmark isn’t a composite of actual hedge fund returns. Instead, it’s a volatility-controlled, momentum-following strategy utilizing the most liquid derivatives and securities in the equities, fixed income, commodities and currency markets. In other words, the index performs like a hypothetical fund manager hewing to a strictly defined—and transparent—strategy.

In the real world of managed futures, fund runners have more latitude in strategy selection and risk management. Their tactics tend to be opaque. But we can gain a little insight by applying some key performance metrics.

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DisclosureBrad Zigler pens Wealthmanagement.com's Alternative Insights newsletter. Formerly, he headed up marketing and research for the Pacific Exchange's (now NYSE Arca) ...

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