Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. INDUSTRY VOICES
August 28, 2017 01:00 AM

Commentary: Managed futures and risk mitigation

Stephen Wood
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Many traditional investment portfolios tend to have a significant allocation to equity markets and are therefore vulnerable to experiencing large losses during times of equity market crisis. Since the global financial crisis, the need to mitigate this risk and find diversifying investments has become increasingly apparent to investors. Investors' portfolios can benefit from the risk-mitigating characteristics of managed futures and in particular from systematic trend-following strategies, which offer the ability to capture trends, both upward and downward, in a wide range of the world's most liquid markets. The managed futures industry has a long history of providing risk-mitigating properties to investors' portfolios. There are several features that make managed futures a valuable risk-mitigating, and performance-enhancing, part of a portfolio. A key concept is crisis alpha: the ability to generate strong performance during traditional crisis periods.

    Managed futures is a class of alternative investment strategy that trades primarily in the world's most liquid and diversifying markets. Typically managed futures follow a systematic, trend-following approach across a wide range of asset classes, including commodities, fixed income, currencies and stock indexes. It is important to understand how different strategies can perform during difficult periods for traditional portfolios. The concept of crisis alpha is commonly referred to in the managed futures industry, and refers to the ability of trend following strategies to generate strong performance by exploiting persistent trends, both upward and downward, that tend to occur across asset classes and markets during times of crisis.

    It is important to differentiate between short-term crises, such as "flash-crash" events that can happen within the course of a day, and longer more persistent crises that can last for a month or more. Here we are concerned with the latter. As managed futures strategies typically seek to exploit effects over several weeks or months, they are less reactive to short-term, short-lived crashes. Indeed, managed futures strategies are not designed to be a panacea for one-day market shocks but they will adapt as evidence builds for a new medium-term market trend, which they are explicitly designed to identify and exploit. Crisis alpha is most frequently discussed in the context of equity market crises, but managed futures are also able to provide diversification and positive performance during crisis periods in other asset classes such as fixed income or commodities.

    In the following chart we show the performance of both Aspect's flagship managed futures strategy, the Aspect Diversified Program, and the MSCI World, with equity crisis periods highlighted in red. Equity crisis periods are the sustained peak to trough drawdowns of the MSCI World using monthly data.

    One of the key features of managed futures strategies is diversification across many sectors and markets. Managed futures performance during equity market crisis periods has come from many different sectors: all asset classes have the ability to contribute to returns during equity crises. This feature is particularly noteworthy in emphasizing the diversified drivers of managed futures crisis alpha.

    A well-known result of modern portfolio theory is that a more efficient investment portfolio can be created by combining diversifying assets. The lower the correlation among assets, the more efficient the resulting portfolio will be. One of the main benefits of adding managed futures to a broader portfolio of traditional stocks and bonds is its potential to decrease the overall portfolio volatility. Although managed futures strategies typically operate at relatively high levels of volatility, consistent with that of equity markets, their low correlations to traditional investments mean that overall portfolio volatility tends to be reduced by the addition of managed futures.

    Trend-following managed futures strategies provide exposure to a broadly diversified set of liquid markets. Responding systematically and dynamically to trends in global markets, they are able to profit from the persistent trends in market prices that often accompany market crisis events, providing crisis alpha to investors' portfolios.

    The risk mitigating benefits of managed futures within a portfolio include:



    • the potential to lower overall portfolio risk;

    • the ability to enhance overall returns;
    • providing access to broad diversification opportunities;

    • the ability to perform well in a variety of economic environments; and

    • additionally, improved drawdown profiles.

    Equity, bond and commodity market crises have historically been recurrent but unpredictable, and have wrought havoc on many investors' portfolios. It is uncertain when or in what sector the next market crisis will strike, but an understanding of the risk-mitigating properties of managed futures, and the ability of managed futures to capture crisis alpha, should provide investors with confidence that the strategy will continue to provide these favorable features, whenever the next crisis occurs.

    Stephen Wood is senior product manager, Aspect Capital Ltd., London. This article represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.

    Related Articles
    A rolling stone gathers no moss, but an old risk model does
    The new rate regime: managing income and volatility
    Risk management and the U.S. economy
    Manager split on risk extends to own investments
    Levels of risk for institutions up for debate
    Commentary: Uncovering the hidden trade-offs in risk-mitigation strategies
    Recommended for You
    Claire J. Rauscher and Sarah Motley Stone
    Commentary: Expecting the unexpected — preparing for a pension fund investigation
    Maelle Gavet
    Commentary: Go broad, go early: Why scale and diversification are the answer to venture market turbulence
    John Bowman
    Commentary: Why, and how, our industry must renew its commitment to a fiduciary mindset
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Outlook 2023: Opportunity in a volatile world
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing