What Equity Factor Is Best Combined with Managed Futures?
The one with the lowest correlation to CTAs?
August 2024. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Managed futures and market-neutral multi-factor portfolios often provided similar risk exposures
- Combining quality, low volatility, or value stocks with CTAs worked best
- Momentum, growth, and size combinations were the worst
INTRODUCTION
In a recent research article (read Managed Futures versus Market-Neutral Multi-Factor Investing), we highlighted that managed futures, also known as CTAs, exhibited similar trends in correlation to the S&P 500 as a market-neutral multi-factor portfolio, where we’ve taken Vanguard’s Market Neutral Fund (VMNIX) as a proxy. Although these two diversifying strategies are uncorrelated to each other on average, they seem to have offered the same risk exposures during certain periods.
Naturally, this begs whether it makes sense to allocate to both strategies or select only one for diversification. Our research highlighted that an allocation to managed futures would have generated higher diversification benefits for an equities portfolio than an allocation to a market-neutral multi-factor portfolio, or an equal-weighted combination of both, from 2000 to 2024.
