Behind the Ticker: KMLM & Mount Lucas Management

In this episode of Behind the Ticker, Brad Roth, CIO of Thor Financial Technologies, talks with Jerry Prior, CIO of Managed Futures Strategies and COO of Mount Lucas Management, about managed futures and the KraneShares Mount Lucas Managed Futures Index Strategy ETF (KMLM). Their discussion delves into the benefits of managed futures that include beyond crisis markets, alpha opportunities in liquidity, and what KMLM does differently from other managed futures ETFs on the market. 

You can also listen to this episode on Spotify, Apple Podcasts, or any of your preferred streaming platforms.

Managed Futures Aren’t Just for Crisis Markets

Jerry Prior, CIO of Managed Futures strategies and COO at Mount Lucas Management, has been at the firm for nearly thirty years. Mount Lucas spun out from Commodities Corp in 1986 and has run managed futures and global macro for institutional investors ever since. In 2020 they brought the managed futures strategy to the ETF wrapper with the KraneShares Mount Lucas Managed Futures Index Strategy ETF (KMLM).

The origin story of the firm's flagship index is one of the more interesting in the asset management world. Equity and credit markets exist to fund the capital structure of businesses. Futures markets exist for a different reason — once those businesses are up and running, they face real operational risk around input and output prices, interest rates, FX, and commodities. A corn farmer faces real risk that the price of corn collapses between planting and harvest. Futures markets give those businesses a way to hedge that risk and gain price certainty. Mount Lucas, and the managed futures industry broadly sits on the other side of that risk transfer, systematically owning price risk through time in exchange for a risk premium. The MLM Index was built in 1988 to capture that premium, and four decades later, it remains largely unchanged. 

KMLM tracks the MLM Index and trades 22 of the deepest, most liquid futures markets in the world, including U.S. Treasuries, U.K. Gilts, Japanese government bonds, Canadian government bonds; currencies like the yen, euro, Canadian dollar, etc.; and commodities (crude oil, gold, soybeans, wheat). The crucial point Prior makes is that these markets get more liquid in periods of stress, not less. That liquidity is what makes the diversification benefit actually usable. It’s for diversification purposes that the fund deliberately excludes equities. Investors already own equities through countless other vehicles, and there are better ways to own equity than trend following them. Mount Lucas would rather give up some average return in friendly markets in exchange for sharper diversification in the moments KMLM is actually being hired to perform.

The 2022 environment, when stocks and bonds went down together, is the cleanest illustration of why managed futures earn their place in a portfolio. Mount Lucas was up roughly 30% that year. Notably though, the strategy is one that offers opportunities beyond just crisis markets, where managed futures earned their reputation. Mount Lucas’s long history going back to the 1970s and 80s, showed it also works in inflation. That four-decade dormancy of inflation as a market risk obscured the strategy's full capability, with 2022 offering a sharp reminder of the potential. 

Tune into the episode to uncover the overlooked role of liquidity as alpha, what investors should expect from KMLM distributions, and more. To learn more about Mount Lucas Management, you can visit their website.

Disclaimer: The market insights, projections, and investment strategies expressed in this article are solely those of the contributor and do not necessarily reflect the views or opinions of . This content is provided for informational purposes only and does not constitute financial, investment, or legal advice.