Futures Show the Futility of Timing

Managed futures funds may defy market timers more than any other asset class, judging from their recent performance.

In 2008, a year when nearly every asset class suffered sizable losses, managed futures returned 14.1 percent, according to BarclayHedge. That showing caught the attention of investors, including many pensions and institutions, for the first time. Assets in managed futures funds have climbed from $172 billion in 2007 to $328 billion this year, according to BarclayHedge. Institutions that made investments last year include New Jersey’s Division of Investment, which put $128 million into Winton Futures Fund, and Teacher Retirement System of Texas, which allocated $400 million to AQR Delta Offshore Fund.

But newcomers to managed futures have reason to be disappointed with the results. In recent years, managed futures have languished. While the S&P 500 gained 26.5 percent in 2009, managed futures lost 0.10. Managed futures lost 3.1 percent in 2011, compared with a gain of 2.1 percent for the S&P 500.

Now some managed futures managers worry that investors may become disillusioned with the sector, according to a recent report by Citi Prime Finance. The report says that investors often try managed futures at the worst time — just after the sector has had a period of hot performance. “Commodity markets are subject to boom and bust cycles and periods of intense volatility,” the report says. “Many investors buying in at the top of the cycle are dissatisfied with the subsequent performance of their managers and alarmed by the volatility these allocations contribute to their portfolios.”

Managers of managed futures funds argue that the case for the sector remains strong. Over many years, futures strategies have provided diversification, posting little or no correlations with stocks and bonds. The strategies have done particularly well during years when stocks were plummeting. When the S&P 500 lost 22.2 percent in 2002, managed futures gained 12.4 percent. In the tumultuous year of 1987, the funds returned 57.3 percent.

Fund companies argue that the strong performance in downturns is no accident. The funds track a full range of contracts in sectors such as oil, stock indexes, currencies and agricultural commodities. Traders can go long or short. Most funds follow trends, betting that rising contracts will continue climbing. Traders often do best during stock downturns because there are clear trends that can last for months. Funds made big profits in 2008 by riding the declines in stocks and oil. Last year traders struggled as some trends reversed suddenly and whipsawed funds. Lately funds have been making money in currency markets. “A lot of trend followers have been shorting the euro,” says Dick Pfister, executive vice president of Altegris, which operates managed futures funds.

Despite the recent bout of subpar performance, some fund managers argue that the industry will continue growing. The number of distinct futures contracts has increased from 273 in 1994 to 1,262 last year, according to the Futures Industry Association. That is opening the doors for traders to try new strategies that can appeal to institutions. To reach conservative pensions, some of the largest managers are reducing their volatility and targeting more modest returns, says the Citi report.

Besides delivering solid returns in hard times, managed futures have proved highly liquid — a feature that was especially important during the sharp downturn of the fourth quarter of 2008. Desperate to raise cash, investors sought to sell holdings. Many hedge funds imposed gates and refused to make redemptions. But because they invest in highly liquid futures markets, managed futures funds could allow clients to take withdrawals. “During the fourth quarter of 2008, 15 percent of managed futures assets were withdrawn, and you did not have one fund suspend redemptions,” says Sol Waksman, president of BarclayHedge.

Bottom line: To time these investments, it's best to be a bear on other asset classes, unless you go after more conservative offerings.