Managed futures index beats equities but not bonds - sort of a good year-to-date?

What is the right traditional asset benchmark for determining the value of a managed futures fund or portfolio? This is not a easy problem because there is a big difference if you choose an equity or fixed income benchmark. 

The diversification mantra for managed futures has been that it adds value when there are "bad times" such as a recession or an asset market sell-off. Some have argued that managed futures has a crisis alpha and have measured the excess return during these bad time periods.  Managed futures will do better when there is a market dislocation. A normal marketing chart shows that managed futures will do well when stocks have a sell-off like the Tech bubble decline, the Asian crisis, and the Great Recession. However, bonds also did well during those crisis periods. Given the lower return profile of managed futures over the last few years,  some have now stated that managed futures is a good bond substitute. In fact, many say that the allocation to alternative investments should come from bonds. So which one should be used for comparison?

Of course, what is perhaps the odd answer is both. Managed futures should provide better diversification than bonds in bad times and it should have a better return profile than the yield carry from bonds. That said, given the active trading and volatility, managed futures should match closer to stock index returns over the long-run but with diversification benefits. Certainly, the information ratio should be higher than either. This is the holy grail.

The graph above shows the SocGen (Newedge) CTA index compared with stocks and bonds through the first three quarters of the year. Managed futures beat both in the first quarter, underperformed both in the second quarter and now has served as crisis alpha versus equities in the third quarter. Bonds actually did better in the third quarter and has had a smoother return. Managed futures have been between the two major asset class returns. 

No strategy should be judged on a nine month period, but a close comparison provides more information on the usefulness of this alternative strategy. The performance of the managed futures index through the first nine months has been mixed.