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In a rocky year for stocks and bonds, mutual funds pursuing an investment approach that has capitalized on both the bear market in bonds and the bull market in commodities are generating excellent returns.
So-called managed-futures funds follow the maxim that “the trend is your friend.” They implement trend-following strategies in futures markets, using quantitative models to take long and short positions in four major asset classes worldwide: stocks, bonds, commodities, and currencies.
“Trend following can be simply described as going long markets that are rising in price and going short markets that are falling in price,” managers at AQR, which runs the
AQR Managed Futures Strategy
fund (ticker: AQMNX), have written.
The funds afford investors who tend to be concentrated in stocks and bonds a way to get exposure to more than 100 different futures markets, including relatively obscure markets such as European natural gas and Eastern European interest rates.
Managed-futures funds notched an average return of 16% in 2022 through May 20, according to Morningstar, and are delivering on their goal of offering diversification benefits when equity markets struggle.
Natixis’s $2.5 billion
AlphaSimplex Managed Futures Strategy
fund (ASFYX) is up 29%, and the
Pimco Managed Futures Strategy
fund (PQTAX), the largest in the group at $3.2 billion, has gained 15%.
These are some of the higher returns in the mutual fund industry. The
S&P 500 index
has fallen 16% this year, and the
iShares Core U.S. Aggregate Bond
exchange-traded fund (AGG) is down 9%.
Fund/Ticker | YTD Total Return | 3-Yr. Total Return | 5-Yr. Total Return | Total Assets (bil) |
---|---|---|---|---|
Pimco Managed Futures Strategy/PQTAX | 15.2% | 13.3% | 9.2% | $3.2 |
American Beacon AHL Managed Futures Strategy/AHLYX | 13.3 | 9.6 | 7.5 | 3.2 |
AlphaSimplex Managed Futures Strategy/ASFYX | 29.2 | 16.2 | 9.2 | 2.5 |
Abby Capital Futures Strategy/ABYIX | 14.4 | 10.1 | 6.2 | 2.2 |
LoCorr Macro Strategies/LFMAX | 13.9 | 9.3 | 5.8 | 2.0 |
AQR Managed Futures Strategy/AQMNX | 26.3 | 7.2 | 3.4 | 1.4 |
S&P 500 Index | -16.1% | 14.0% | 12.6% | — |
IShares Core U.S. Aggregate Bond ETF/AGG | -9.3 | 0 | 1.1 | — |
Note: Data as of 5/23/22; three- and five-year total returns are annualized.
Sources: Morningstar; FactSet
Most investors don’t short stocks or bonds or participate in commodity markets. Managed-futures funds offer a disciplined way to get that exposure. The funds do best when there are strong trends to exploit, including this year’s drop in global bond markets, a rise in commodity prices, and a gain in the dollar. Choppy markets, however, can lead to negative returns.
“When markets go from good to great or bad to worse, that’s when these strategies tend to shine,” says Yao Hua Ooi, who co-manages the AQR Managed Futures Strategy fund, up 26% so far this year.
“The strategy holds winners for a long time and stops out of losers quickly, so losses tend to be smaller,” says Matt Dorsten, a manager of the Pimco fund.
Dorsten says the Pimco fund has had a negative correlation with the S&P 500, which supports the diversification argument.
This year’s ample gains in managed-futures funds follow a multiyear period of uneven returns. Except for the Natixis fund, the funds’ performance has trailed the S&P 500 over the past three years, and all are trailing the index over five years. But they are comfortably ahead of the bond market.
Managed-futures funds hold about $18 billion. They are among the largest liquid-alternatives funds, which seek to offer individual investors access to strategies long practiced by institutions, including long/short equity. Commodity-trading advisors have used trend-following strategies for decades.
If the stock and bond markets are in a period of volatile performance much like the 1970s, trend-following strategies may continue to find markets to exploit. “We’re able to change positioning over time, and adapt to differing opportunities in a macro environment with higher inflation than most investors have seen in 40 years,” says Katy Kaminski, a manager of the AlphaSimplex Managed Futures fund. “The game is changing and what’s working is different. Most investors are biased to be long equities. That normally works, but sometimes it doesn’t.”
Kaminski says the fund did well in early 2020 when equity markets were hammered. It was long bonds and short oil and other commodities after the Covid pandemic hit, the opposite of recent positioning.
Simon Scott, director of global alternative ratings at Morningstar, says the funds hit a “sweet spot” this year as commodities rallied and bonds cratered. Equity markets, while down around the world, haven’t contributed much to the funds’ performance because movements have been choppier.
As for the diversification benefits, Scott says: “There is nothing in the structure that says they will go up when equity markets go down. A lot of people think there is a kind of magic lever that they pull.”
Also, annual fees are relatively high at an average 1.75%, due to the technology and personnel required to implement the strategy.
Some trends the funds exploited this year in bonds, commodities, and currencies have reversed recently. But the funds’ strong returns have reinforced arguments for diversification.
The idea behind managed-futures funds was championed more than two centuries ago by the British economist David Ricardo, who is believed to have said, “Cut short your losses, let your profits run.” It seems as relevant today as in the 1800s.
Write to Andrew Bary at andrew.bary@barrons.com
Read More: Take a Look at These Trendy Funds. They’re a Smart Bet in a Tough Market.