Tuesday, July 5, 2016

Managed futures performed when expected - in a crisis

After a strong first two months of the year, managed futures gave back gains and started to disappoint investors. I include myself in the crowd that questioned the ability of managers to hold gains. Well, investors has to eat their words with solid gains for managed futures following the BREXIT vote. 

Trend-following is non-predictive in the sense that you cannot forecast when there will be market dislocations and you cannot predict when trends will occur. Signals are identified, action is taken, and returns are generated until the trend is exhausted. There is skill in trend identification and management, but this is not the same skill as those managers that fancy themselves as predictors or forecasters of future market behavior. The more "humble" trend-followers just try and find an existing trend and act to extract some of the price movement.

No trend-follower predicted the BREXIT vote. My guess is that some may have been on the wrong side of equity moves, but for the trends that occurred they exploited regardless of votes or predictions. The usual strong fixed income exposure was a fund winner.

Managed futures have moved ahead of equity indices and the broad bond aggregate for the first half of the year, but there are still some disappointments with performance. Looking at the strong bond and commodity moves this year suggests that diversification and variable long and short positions actually dampened returns. Assuming close to 50 percent or more exposure in fixed income and commodities means that equities and currencies were negative contributors to performance and active trading placed a drag on gains. Nevertheless, managed futures has done well versus many other hedge fund styles.

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