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YIELD OF DREAMS: Managed Futures for Crisis Alpha, But What About the New Normal?

Sure, we’ve all heard about the benefits of managed futures, i.e. their supposed ability to generate returns in periods of crisis. Jon Sundt, president and CEO of Altegris, referred to it as “crisis alpha,” during the Managed Futures Forum held Tuesday in New York. Just look at 2008; the Barclay CTA Index, which tracks 565 managed futures programs, returned 14.09 percent in 2008, as every other asset class was under water.

But the majority of managed futures managers are trend followers, meaning they react to price movement and ride trends, Sundt said. They don’t try to make a prediction about where the markets are headed. The hard part if knowing you’re in a trend when it’s happening, Sundt added.

After attending the Managed Futures Forum, it got me thinking: How long do trends really last in this environment? And if we are entering a ‘new normal’ of sorts, where the markets reverse course on a dime and over short periods of time, how will managed futures perform? In 2011, not so great. The Altegris 40 Index, which tracks the performance of the 40 managed futures managers, was down 3.14 percent in 2011:

Greg Anderson, chief investment officer of Princeton Fund Advisors, said managed futures managers can’t change positions quickly because they operate on a reactive basis. For example, when the markets shot up in October, these managers were positioned against the market, and many of these funds suffered.

Granted, 2012 has not seen the same level of volatility, with the VIX already down 24.87 percent year-to-date. When fear unwinds, you’ll see more trends developing, and managed futures managers can capitalize on that.

According to Sundt, managed futures strategies made money 12 out of the last 14 years; 2011 just happened to be very choppy, a hard environment for these funds to make money. These managers really need trends to last three months or longer to generate returns. Anything shorter and it becomes hard to jump on fast enough.

Still, I’m not convinced we’re out of the woods yet; volatility could rear its ugly head again. And if you’re looking for managed futures to smooth out your portfolio in these choppy times, be careful. We know that managed futures managers don’t try to predict where the markets will head, but they also can’t tell us how long the volatility will last, which is kryptonite to the success of their strategy.

(Read more from Staff Writer, Diana Britton on her blog, Yield of Dreams.)

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