Economics

Why Managed Futures Is No Monster

The asset class just moves differently by design

Hollywood has done a disservice to many a classic horror tale. Take Mary Shelley’s Frankenstein, for example.

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Yes, the creature seems a hideous sight to the average villager. But to the blind Mr. DeLacey, he appears in his true form: thoughtful and generous.

It’s only when confronted by the irrational behavior of others, does the creature turn into a real monster.

More than meets the eye

Shelley’s story is similar to how some investors think about managed futures. In fact, Longboard research shows that many financial advisors rank managed futures as one of the least effective diversifiers.

Managed Futures

They couldn’t be more mistaken. Historically, managed futures has been among the top diversifiers, precisely because it is uncorrelated to the stock market. Since 2000, the asset class performed positively in 13 out of 15 of the S&P 500’s worst-performing months.

Others think of managed futures as just a hedge. But the facts show it has the potential to be a very strong diversifier over the long-term, when incorporated into a properly diversified portfolio.

That’s because managed futures seeks premiums from the types of risk that could occur in most economic environments. It typically outperforms during periods of sustained price trends across multiple asset classes and underperforms in times of low volatility.

Historic returns beat a bad rap

So why do so many advisors today want to drive managed futures out of the proverbial village? We think it’s a mix of short memories and all-to-human emotions.

Managed futures experienced gains during the 2014-2015 deflation. But as those deflationary trends reversed in 2016, managed futures performance suffered. Stocks went up, managed futures went down and bonds were flat.

But in other years, like 2008, the roles reversed. Market conditions influence which portions of an investor’s portfolio are performing—and these constantly change through market cycles.

Shelley’s creature never wanted to be a monster. He taught himself French and read the works of Milton, Plutarch and Goethe, required reading for gentlemen of his day.

But like managed futures, he was never given the things he needed the most – time and commitment by others – to reveal his true purpose in life.

Article by Longboard Funds