After a challenging few years for managed futures, 2014 was a welcome change with a positive year for the investment style; the Barclays BTOP50 index returned 12.3%. Many investors question whether this will continue. We believe there are several reasons to be optimistic. Our outlook considers two factors that historically have played a significant role in managed futures' performance: correlation and trends.
A key feature of managed futures strategies is the ability to invest across a wide range of global markets, thereby seeking a diverse set of alphas.
We believe that to fully realize the diversification benefit of investing in a wide array of markets, correlations across these markets need to be low. When markets behave more idiosyncratically, managed futures programs have the ability to maximize the number of independent trades they put on at any one time, which should allow for increased return potential.
Conversely, when correlations either spike or persist at elevated levels, as they generally did for the period since the financial crisis through early 2014, we believe the number of truly differentiated trades a managed futures strategy can put on greatly decreases.
As a result, instead of having a collection of independent trades, a managed futures manager might, only in essence, have a single trade because all markets are behaving in much the same way.