Trend-followers versus managed futures - Is there a difference?

Investors can look at existing managed futures indices to get an idea of how trend-followers compare with managed futures. Some will ask the simple question is there a difference? The answer is yes. Managed futures is a much broader strategy than just following trends and will provide unique returns and diversification value, but the proof of the difference is in the data.

We compare the SocGen managed futures index which represents the 20 largest CTA managers against the trend-follower index from SocGen which includes the 10 largest trend-following managers. The trend-following index is a sub-component of their managed futures index. All ten of the trend-followers are in the larger managed futures index. The SocGen managed futures index without the trend-followers will be the CTA index of other strategies.

The first graph shows the NAV of each index to show the overall performance between the two. They will be closely correlated given  one is a subset of the other. The correlation is above .95 for any rolling 250 day period. However, there are periods of significant return differences. To better illustrate the differences, we have plotted the excess return of the trend-followers over the managed futures index. You can see there are clearly long periods periods when trend-followers will do better like the last year. In fact, the trend-followers do a lot better than the CTA index in the long-run. Nevertheless the annualized difference is under 2% per year.

To get that higher performance, trend-followers do take on more risk. The volatility of the trend-followers is significantly higher although the difference has closed. The drawdowns for trend-followers are also greater than the managed futures index. 

All managed futures managers are not alike. Therein value in finding a mix of managers beyond trend-followers. Fining other strategies will dampen volatility and cut drawdowns and even though there will be some sacrifice in return, the impact is not large on an annualized basis.