Simulations show value of managed futures

A new paper discusses how to use simulation to help evaluate hedge fund investments. The paper provides a simple methodology for running simulations across a number of allocation approaches which can provide added insight on the value of hedge funds. The authors, Marat Molyboga and Chris L'Ahelec, simulate the performance of adding 10% managed futures to a classic 60/40 stock bond mix. The simulations were run for a number of portfolio structures ranging from minimum variance to equal risk as well as a control of random managers. The authors find that managed futures will provide meaningful improvement in Sharpe ratios and other portfolio statistics.

The tables below show the improvement in the Sharpe ratio of adding just 10% managed futures through a number of approaches. This is simulation over a long period provides strong evidence that a reasonable small allocation can make a difference. There have been studies that have shown the value-added of manage futures, but the numbers are often out of the realm of what would be normal for most investors. The simulations show that there would be improvement in well over 95% of the cases run. The comparison of portfolio approaches show that simple volatility equalization will be more effective than a minimum variance approach. Given the process of simulating portfolio returns, we can be very comfortable that there is improvement with diversifying with managed futures.