Brad Zigler: Packaged Managed Futures Aren’t (Mostly)

April 28, 2011

 

How Much Is Enough?

Let's posit the classic 60/40 portfolio as our starting point: 60 percent stocks and 40 percent bonds. We'll sample the effect of 10- and 20-percent carve-outs from stocks to managed futures—with monthly rebalancing—over the past three years in Chart 2. We'll use the Chart 1 indexes as stand-ins for our portfolio components.

 

Table 2 - Three-Year Portfolio Performance (March 2008 - March 2011)

 

With 10%

Managed Futures

With 20%

Managed Futures

Without

Managed Futures

Average Annual Return

2.9%

3.3%

2.2%

Annualized Volatility

9.8%

7.8%

11.3%

Sharpe Ratio

0.13

0.23

0.06

 

From the track record, two things become readily apparent. First, adding managed futures boosts overall portfolio performance by enhancing returns and dampening volatility. The portfolio's risk-adjusted return, indicated by its Sharpe ratio, doubles when a managed futures allocation is added.

Second, more is better. Doubling the managed futures allocation increases the risk-adjusted return by a further 75 percent.

 

Chart 2 - Managed Futures' Portfolio Impacts

Chart 2 - Managed Futures' Portfolio Impacts

 

Limited Investment Options

Before 2003, the recommendation and brokering of managed futures products was effectively foreclosed to anyone who wasn't a commodity broker. The commodity pools and separately managed accounts then available were also heavily fee-laden. Changes in the regulatory scheme have since allowed the creation of lower-cost commodity-based mutual funds and exchange-traded products that can be marketed by stock brokers or bought by self-directed investors.

The trouble is, many products touted as "managed," really aren't. The first generation of commodity securities was index-based. It's only been within the past two or three years that actively managed products have debuted. Of those, the first to market were mutual funds. It's the rare exchange-traded fund or note that can claim to be actively managed. And some of those, in fact, are really index trackers in disguise.

A flurry of new products have launched recently, but their short track records necessarily limits analysis. We'll look at representative managed futures products that have been around for more than a year, benchmark their performance against the returns generated by a commodity index tracker and see if any alpha's been earned recently.

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