Investors have a track record of giving up on strategies at the very worst time.
Managed futures — designed to protect investors when equity markets are at their worst — are performing better than they have since 2014. Yet investors have been pulling their money at a record pace. Recent underperformance is not the only issue. Many have started to believe the strategies simply don’t work anymore.
Redemptions from managed futures funds rose 22 percent between the end of 2018 and September. Investors have pulled more than $11 billion in 2019 so far and withdrew $19.3 billion in 2018. The flows aren’t surprising. Managed futures lost almost 6 percent in 2018 on average while equities also lost money, contrary to their supposed role as stock-market hedges.
CTA assets of hedge funds and mutual funds were below $60 billion in the middle of 2019, having fallen dramatically from their peak of $100 billion-plus around 18 months earlier. Part of the reason for the extreme flows in and out of funds — besides investors chasing performance — has been the rise of model portfolios at the big brokerage firms, according to experts. The models, which are designed to be simple, generally allocate money to just one manager in each category. But as a result, they come with a high degree of manager risk.
But investors that fled missed out on some good returns. Cantab Capital Partners’ fund was up more than 41 percent in 2019 through August; Aspect Capital’s diversified systematic fund gained almost 28 percent over the same period.
“Many investors have capitulated, but nonetheless we’ve seen increasing interest from institutional investors who are overallocated to equities here, especially in customized mandates,” said Mick Swift, deputy CEO and research director at Abbey Capital, a managed futures firm in Dublin and New York.
“Here’s my analogy: you only catch a fish if your line is in the water all the time. You can’t pick the right time to drop the line,” he told Institutional Investor.
Concerns that managed futures aren’t working center on a number of reasons, including too much money chasing the strategy, global monetary policy spurring appetite for equities, and a lack of price-movement trends. Markets, the argument goes, have changed.
“In the last 10 years, the world has gotten used to stocks going up,” said Swift. “There’s complacency around volatility and central banks intervening to make it better. I agree that’s a big change. But managed futures managers continue to research those changes every day as well.”
A wide dispersion in how asset managers of these strategies perform is another problem, according to Andrew Beer, managing member of Dynamic Beta Investments, which offers a managed futures exchange-traded fund. The returns of good and bad funds can differ by 30 percent. Investors then follow the best performing managers, who in turn may disappoint the next year. Data show that funds with more than $1 billion in assets that performed well last year enjoyed big inflows in 2019.
Beer said the investment strategy may also have disappointed investors because whether they lose or make money depends on the opportunities available in the market at a particular time. “If equities are trending nicely, but commodities keep gyrating up and down — giving off false signals — they might make money in the former but lose money in the latter,” he said. “The best environments are those where multiple asset classes move by a lot at the same time. August was like that: Treasuries soared across the board, gold rose 7 percent, the Euro declined — all clear trends leading into the month,” Beer added.
Naturally, he sees folly in abandoning managed futures at a time when investors aren’t positioned for a downturn.
“What if things break down in a meaningful way? You saw signs of that in July and August and managed futures did incredibly well,” Beer noted. “The widespread fear quickly reversed and managed futures gave some of those returns back. That is the point of the strategy.”