Inflation is a risk that is often overlooked in portfolios. Additional information regarding the construction of these results is available upon request. Hypothetical strategies and indices presented are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Into the Classic 60/40 Portfolio (weekly rebalancing) Sources: Simplify Asset Management Bloomberg.The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Even though the CTA index has experienced periods of higher volatility with inferior risk-adjusted returns to the broader bond market, an absolute return-like profile has indeed been delivered. Since 2000, the managed futures index has consistently appreciated alongside the bond market, while tending to outperform during periods of bond market selloffs and higher inflation prints. Let’s now see if managed futures really deliver on each of these fronts.įigure 1 shows historical returns of the SG CTA Index 2 versus the Bloomberg US Bond Aggregate Index. The three most often-cited potential portfolio benefits of CTAs are For example, when the long-term trend is flat, a violent move in either direction might subsequently trigger an entry by a large long-term trend-follower, and would provide a large tailwind for an earlier entry. For example, a common carry trade is to capture the roll yield available on the Treasury yield curve, which will contribute an absolute return if the curve is static, while simultaneously offering a risk-off hedge by virtue of being long Treasuries.įinally, “volatility breakout” indicators are often used by shorter-term managers to enter a position in the direction of an event that they believe would trigger the largest players to buy or sell based on an upcoming trend signal. “Carry” trades represent a third key strategy for managed futures, with the goal of seeking to monetize structural risk premia embedded in futures calendar spreads. More sophisticated versions of these strategies could be more fundamental in nature, where macro- and micro-economic factors, both fundamental and quantitative, are used to establish “fair” value the asset should mean-revert towards. These models are typically price-based, taking the form of oscillators such as the Relative Strength Index. “Overbought/oversold” strategies are a ballast to momentum algorithms, designed to help improve entry and exit of the core trend-following systems. These strategies are a key source of both absolute return, low correlation to equities, and positive convexity. You can think of trend following strategies like a long option (call or put) position, since the position size is scaled higher (long or short) as the security trend strengthens or weakens. Trend following simply relies on the continued persistence of price movement to generate returns. The core algorithm used by CTAs is “trend following”, which invests based on current price trends (i.e. Let’s now review some of the more common types of models used within CTAs. Managed futures strategies are also usually managed to achieve a target volatility (based on historical data analysis). These signals are then aggregated into a portfolio of long/short holdings, with more advanced CTAs accounting for things like correlations, transaction costs, and market impact when scaling positions in and out of the portfolio. These funds typically deploy a suite of distinct algorithms that forecast expected risk and return across all markets considered and across multiple forward-looking time horizons. Managed futures strategies target consistent, diversified returns through systematic, rules-based investment in a portfolio of futures contracts across equity, fixed-income, commodity, and foreign-exchange markets. Finally, we show that managed futures can also serve as a compelling inflation hedge, that can continue to be accretive to portfolios even during non-inflationary periods. We then show how pro-rata shifting a slice of the classic 60/40 portfolio into CTAs can ultimately enhance risk-adjusted returns. This blog begins with a brief overview of managed futures, then walks the reader through the three core potential portfolio benefits: With recent SEC rule changes around the use of leverage and derivatives, managed futures are now available via ETFs, democratizing one of the most compelling risk exposures outside of bonds and equities. Managed futures strategies (aka CTAs 1) have a long history of playing a key role in enhancing investment portfolios for wealthy individuals and institutions with access to hedge funds.
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