Managed futures and volatility - a little harder to link than some would think

A recent Morgan Stanley report presented the following chart on the performance of managed futures and global macro strategies. The first conclusion from MS is that managed futures will do better in higher volatility environments. The second chart states that global macro will have better return to risk in equity market drawdowns. The same conclusion has been a key foundation for choosing managed futures.

I am a strong believer in the value of global macro and managed futures during crisis periods, but the  first assertion that managed futures does better in higher volatility environment is not always clearcut. Managed futures will perform better when there is more spread or dispersion in prices over time but that is not the same thing as doing well when volatility is higher. You can have more spread in prices with less volatility if there is a strong trend in one direction. Volatility can have dispersion but choppiness will also be present.  Reversals in a range is dangerous for most trend-following CTA's.

There is usually more positive autocorrelation in a time series when there is higher volatility. This suggests that trend-followers will do well during high volatility periods, but this autocorrelation advantage is offset by reversal risk. This is why we often focus on the idea of price divergence as the key to managed futures.

Global macro should do well in an equity drawdown not because it gets the equity call right, but because they are able to go long or short across asset classes. The diversification of direction and asset class will increase the opportunities available. Global macro should also be able to exploit  changes in the financial or business cycle that are not possible from a long-only investment in equities which is subject to a time-varying risk premium.