Hedging via Managed Futures Liquid Alts
Exploring Low-Cost, Tradable CTAs
September 2019. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Managed futures strategies provided attractive diversification benefits during the financial crisis
- The strategies have become available as mutual funds and ETFs
- Mutual funds provide the same exposure as private vehicles, ETFs do not
INTRODUCTION
The mafia and the hedge fund industry share some characteristics. Both are powerful, intransparent, and create little value for society. Naturally the mafia is a criminal organization while the only “criminal” element of hedge funds are the high fees they are charging for their services.
However, there are pockets within the hedge fund universe that differentiate themselves. Managed futures are often considered part of the industry, but these products rank relatively high on transparency and have more moderate fees. Furthermore, they tend to offer good liquidity terms and are specifically designed to provide high diversification benefits, in contrast to many classic hedge fund strategies like long-short equity that feature elevated correlations to stock markets.
In recent years managed futures strategies have become available as liquid alternative mutual funds and even ETFs, which makes them more accessible for investors. However, it is questionable if these strategies provide the same risk-return profile when offered in public versus private vehicles (read A Horse Race of Liquid Alternatives).
In this short research note, we will investigate managed futures mutual funds and ETFs (try Finominal’s Security Analyzer for ETF or mutual fund analysis).
MANAGED FUTURES INDUSTRY
Investors have allocated slightly above $3 trillion to hedge funds, but not increased allocations in recent years as there was little to zero alpha generation. Managed futures comprise about 10% of the universe or roughly $300 billion, an allocation that has similarly remained almost constant since 2010 (read Hedge Fund ETFs).
The strategy ha
