Managed Futures Strategies

April 23, 2012

Risk/Return Statistics That Complement Traditional Portfolios
Since the index went live in 2004, the DTI has provided superior returns to the S&P 500 Index,12 with 679 basis points less annualized volatility and lower downside risk. Relative to commodity strategies, such as the S&P GSCI Index and the Dow Jones UBS Commodity Index, the DTI has performed admirably, with greater risk-adjusted returns and lower downside risk. Figure 3 also shows that the DTI’s returns since 2004 have been in line with the Newedge CTA Trend Sub-Index and the Barclay Systematic Traders Index.

A key point: The DTI was able to achieve returns within 1 percentage point per year of the Newedge CTA Trend Sub-Index with less volatility, even taking into account the fact that the Newedge CTA Trend Sub-Index involves reporting biases inherent in CTA indexes.

Annualized Risk And Return Characteristics: 1/1/2004-12/31/2011

Maximum Drawdown13
The diversification benefits and the flexibility of a long/short strategy can benefit investors in rising as well as falling markets. Investors point to low correlation and sometimes negative correlations to traditional investments, as well as favorable CTA performance in crisis events.

In recent memory, managed futures attracted attention for positive performance in the face of the financial crisis of 2008, when the S&P 500 Index was down approximately 37 percent. The ability to diversify and go both long and short has proven advantageous for the DTI, as the index has shown lower volatility than other major asset classes, save U.S. bonds.

In addition to the favorable volatility relative to the other asset classes shown, the DTI has had a maximum drawdown of 15.65 percent since 2004. This maximum drawdown was one-third of that of U.S. stocks. To put it into perspective, commodity strategies experienced a maximum drawdown of between 54 and 67 percent.

Calendar-Year Returns
Managed futures strategy funds certainly raised their profile among investors during the 2008 financial crisis. While global markets were falling off the cliff in 2008, there was a clear and discernible pattern that allowed trend followers to go short in many of the declining markets and go long those futures that reflect a flight-to-safety quality. The DTI showed returns of 8.29 percent, and the Newedge CTA Trend Sub-Index had returns of 20.88 percent. The higher returns might be explained by funds employing more leverage on their positions, while the DTI provides only one-to-one exposure to the market.

Trend-following strategies suffered in 2009 and 2011 when the equity markets were positive. A long/short managed futures strategy like the DTI can be described as one gauge of volatility in its components or strong trends in those underlying markets. When there is a lack of strong trends in the DTI’s components, the DTI’s performance is apt to suffer. This environment showed that one of the limitations of a trend-following approach could be a challenge identifying profitable trends during volatile markets. These specific volatile markets were influenced by the zero-interest-rate policy established by the Federal Reserve, as well as ongoing interventions in the currency and interest rate market by global central banks that caused wide deviations and fluctuations of price trends in commodity, currency and interest-rate markets.

Downside Table: 1/1/2004-12/31/2011

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