Combining Risk-Managed Equities and Managed Futures – II

Do you need risk management for equities in a diversified portfolio?

April 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

• Risk managing equities increases Sharpe ratios, but can decrease returns
• Taxation and expected returns matter
• However, the choice of diversification strategy likely matters more

INTRODUCTION

In November 2024, we published a research article exploring whether investors should apply risk management to their equity allocation within a diversified portfolio. The proposed risk-management framework utilized a straightforward trend-following strategy, shifting from equities to cash when the stock market’s one-year rolling return turned negative (read Risk-Managed Equity Exposure II). Diversification was incorporated through an allocation to managed futures funds, which capitalize on long and short trends across various asset classes. The analysis examined a portfolio spanning approximately 20 years but did not reach a definitive conclusion on whether equities should be risk-managed (read Combining Risk-Managed Equities and Managed Futures).

Recently, we expanded our data library to include returns for managed futures strategies dating back nearly a century. With this extended dataset, we will revisit the question using longer lookback periods and additional data sets.

MANAGED FUTURES VERSUS U.S. STOCKS

We have four different sets of data for managed futures funds. Notably, the two datasets with the longest histories – the AQR Managed Futures Index and the Anonymous Asset Manager CTA Index – are based on backtested returns rather than actual fund manager performance. As a result, these figures should be interpreted with caution, as they do not account for transaction costs, management fees, or model risk (read How Much Should You Allocate to Managed Futures?).

Although the returns of the AQR Managed Futures Index should be interpreted with caution due to their backtested