Alternative Strategies vs Interest Rates

Similar performance – coincidence or causation?

July 2026. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • CTAs & equity market neutral funds have benefited from rising rates
  • However, they don’t exhibit interest rate-sensitivity per se
  • Rather, the lack of trends and negative investor sentiment were detrimental

INTRODUCTION

What is the right benchmark for a hedge fund? The answer depends on the strategy, but for truly uncorrelated strategies, it should be at minimum the risk-free rate – typically proxied by short-term government bonds.

One of the less well-known features of certain hedge fund strategies is that futures-based approaches, such as managed futures and CTAs, only require a small portion of their capital as margin to support their trading activity. In practice, this means that 80 to 90 percent of the capital sits idle from the perspective of the core strategy and is typically invested in T-Bills. This embedded cash return forms a base return that can mislead allocators unaware of it – leading them to attribute performance to manager skill that is partly explained by prevailing interest rates.

Given that interest rates have risen sharply over the past few years, a natural question follows: have uncorrelated hedge fund strategies mechanically generated more attractive returns as a result? In this article, we explore the relationship between interest rates and the performance of two uncorrelated strategies – managed futures and equity market neutral hedge funds.

PERFORMANCE OF MANAGED FUTURES & EQUITY MARKET NEUTRAL FUNDS

We construct two equal-weighted indices comprising publicly traded U.S. mutual funds – one for managed futures and one for equity market neutral strategies – selected primarily on the basis of low correlation to equities. The managed futures index has seven constituents (AHLPX, AQMNX, EVOIX, GMSSX, MFTNX, PQTIX, RYIFX), and the equity market neutral index has four (BDMIX, JMNSX, QMNIX, VMNIX). We use 2010 as the starting date, as this is the earliest point at which at least two funds were live within each index.

The performance of both strategies was broadly flat between 2010 and 2020, followed by a marked improvement thereafter. It should be noted that this fund set excludes liquidated funds and therefore