Some 60% of all managed futures assets will come from institutional investors within five years, up from about one-third now, experts predict.
Managed futures assets totaled $213 billion as of Sept. 30, according to Barclay Hedge Ltd. At that rate, assets in managed futures are likely to grow to $500 billion over the next five years, according to executives of single-manager firms and funds of funds.
Some institutions have been using managed futures for years, including the $5 billion pension fund of Eastman Kodak Co. and the $48 billion Virginia Retirement System. More recent converts include the $83 billion Teacher Retirement System of Texas, the US$115 billion Caisse de Depot et Placement du Quebec and the $198.9 billion California Public Employees' Retirement System.
Managed futures managers, also known as commodities trading advisers, trade in futures in three financial sectors — currency, stock indexes and interest rates — and three non-financial sectors — energy, metals and agriculture. Institutions are accessing the asset class via specialist CTA funds-of-funds managers, through direct investment in single-manager CTAs and via investment platforms that offer a choice of hundreds of vetted traders.
The new-found popularity of managed futures managers or CTAs during 2008's market crisis — when almost every other asset class was deeply negative and managed futures scored positive gains — did not go unnoticed by institutional investors.
As equity returns plummeted in the last four months of 2008, managed futures returns soared. The Barclays CTA index was up 14.09% in 2008, while the Standard & Poor's 500 index sank 36.99% and the Morgan Stanley Capital International World index dropped 41.93%.
In the first quarter of 2009, the Barclays CTA index returned -1.88%; the S&P 500, -10.98% and the MSCI World, -10.65%.
As performance of global equity markets started rebounding in March, returns of managed futures managers sagged.
In the second quarter, the S&P returned 15.91%; the MSCI World, 22.38%; and the Barclays CTA index, 0.77%. In the third quarter, the S&P was up 15.59%; the MSCI, 17.97% and the Barclays CTA, 1.93%.
The non-correlation to equity markets and the downside protection offered by CTAs are catching the attention of executives at pension funds, foundations and endowments.
“You want your seatbelt to work in a wreck, not when you're not in a wreck,” said Salem Abraham, president and co-founder of CTA manager Abraham Trading Co., Canadian, Texas. “After the rough ride of 2008, investors are looking much more carefully at managed futures.”
Abraham Trading experienced $110 million of net outflows in the fourth quarter of 2008, most of which was the result of client liquidity needs because of severe market downturns in other asset classes, Mr. Abraham said.
Assets at his firm have risen significantly to $465 million as of Nov. 1, from $310 million as of Dec. 31, with flows fairly evenly divided equally among institutional investors, hedge and managed futures funds of funds, and high-net-worth individuals.
Performance was so much better than that of hedge funds and long-only managers in last year's market decline that “institutional investors have had to focus their attention on the portfolio benefits offered by such a thoroughly uncorrelated asset class. Managed futures has become a strategic allocation in its own right now, rather than a very small part of an overall alternatives allocation,” said Ernest L. Jaffarian, president and CEO of Efficient Capital Management LLC in Naperville, Ill.
Efficient Capital manages $1.9 billion in managed futures funds of funds, of which about 33% is for institutional investors.