We’re big fans of research on Managed Futures around here. That’s why we write about it so much. So when we see the Alternative Investment Management Association releases a whitepaper specifically about the ins and outs of Managed Futures, we dove right in.

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The paper covers all the major points: Definitions of a CTA (Commodity Trading Advisor), How Managed Futures programs trade, the Managed Futures Industry size, the differences between systematic and discretionary, performance, and the diversity of programs in the space.

Two sections we found particularly interesting as one of the top introducing brokers in the space was the importance of manager selection and what a Managed Futures investment can do for your portfolio. First, on the importance of manager selection. Take one look at our Managed Futures database full of performance stats on hundreds of different managed futures programs, and you’ll quickly see there a whole lot of unique strategies doing more than just the vanilla trend-following managed futures has historically been known for. The AIMA says investors are now more aware of this and want to know not just that it can offset stock plunges, but they want to know where the returns come from.

They now like to know what it is that is driving the returns of a managed futures strategy as they seek to construct their portfolio with the same rigour that CTAs adopt when constructing their own. Therefore, when it comes to deciding which, if any, CTA to add to a portfolio, there is no single question to ask. There is no simple approach, and it usually involves a combination of factors. Some investors focus entirely on the quantitative aspects of the CTA and these cannot be ignored.

Equally important, however, are the qualitative aspects of an investor’s due diligence such as an understanding of the managed futures strategy and the operational structures that the CTA has in place.

Next, what a Managed Futures investment can do for your portfolio. A group like the AIMA which represents a broad swatch of the futures ecosystem (see all the players in this cool infographic) can’t really pick one or two of the best-managed futures managers to show how the asset class performs. For one, that would be cherry picking, and second, they would get some grumblings from those that weren’t highlighted. So, they do the tried and true method of viewing managed futures through the lens of the SG CTA index, looking at just how managed futures can a be good addition for returns AND risk.

Hypothetically, and based on the information provided in the table above, the optimal allocation16 to managed futures within the 60/40 portfolio (above) is 40% of the newly created portfolio. In other words, a 40% allocation to managed futures (as per above this would be achieved by reweighting the portfolio split [60% x 60% equities = 36% equities + 60% x 40% Fixed Income = 24% Fixed Income + 40% managed futures] provides the best return (as denoted by the annualised return) at the lowest risk (as a measure of the strategy’s volatility, maximum drawdown, and duration drawdown). In this case, the risk-adjusted return has gone from an initial result of 0.42 to 0.68, an increase of 62%.


Please see AIMA’s explanation for allocation:

From the table, we can observe this by looking at the risk-adjusted return of the 60/40 portfolio of 0.42. Through diversification of this portfolio and re-weighting the split so that we can allocate 20% to managed futures ([i.e. 80% X 60% equities = 48% equities + 80% x 40% Fixed Income = 32% Fixed Income + 20% Managed futures] , the risk-adjusted returns increases to 0.55 – an increase of nearly one third on the initial risk-adjusted return which was produced without managed futures.

The portfolio with a 40% allocation to Managed Futures has the lowest volatility, is a point away from the highest return, with the lowest drawdown (length and depth), and highest risk adjusted return! It sounds too good to be true! And for the most part it kinda is, simply because there are very few institutional managers that would allocate 40% of their money to Managed Futures – see our explanation of that here. But whether institutions are getting the full benefit or not, the argument remains a sold one. Add managed futures for improved risk-adjusted returns {Disclaimer: Past performance is not necessarily indicative of future results}.