Alternative Investing

Understanding Managed Futures

Topics - Alternative Investing Trend Following Portfolio Construction

Read Time - 15 mins

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Understanding Managed Futures

Managed futures is an alternative investment that has historically achieved strong performance in both up and down markets, exhibiting low correlation to traditional investments. It was one of the few investing styles that performed well in 2008 as most traditional and alternative investments suffered. As a result, this little understood strategy has attracted much attention.

Hedge funds and commodity trading advisers (CTAs) have pursued managed futures strategies since at least the 1970s, shortly after futures exchanges expanded the set of traded contracts. Still, many investors have shied away from them, perhaps due to a lack of understanding of how and why they work.

The primary driver of most managed futures strategies is trend-following or momentum investing — that is, buying assets that are rising and selling assets that are declining. These strategies are typically applied to liquid exchange-traded futures contracts on various commodities, equity indices, currencies or government bonds.

Trend-following strategies only work if price trends continue more often than not. But why should they? One explanation comes from Daniel Kahneman and Amos Tversky’s Nobel Prize-winning work on behavioral economics in the 1970s and a subsequent large body of research that links behavioral biases to underreaction in market prices.

This paper demonstrates the potential strong performance and diversification benefits of a simple managed futures strategy. The simple portfolio shows explicitly how a managed futures strategy can be implemented in an attempt to demystify the asset class. The hypothetical Simple Managed Futures Strategy has produced strong returns in both bear and bull markets, and has performed consistently across markets.

This document is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein.

This document has been provided to you solely for information purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and AQR Capital Management, LLC (“AQR”) to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. This document is not to be reproduced or redistributed to any other person. The information set forth herein has been provided to you as secondary information and should not be the primary source for any investment or allocation decision. Past performance is not a guarantee of future performance. Diversification does not eliminate the risk of experiencing investment losses. 

This material is not research and should not be treated as research. This paper does not represent valuation judgments with respect to any financial instrument, issuer, security or sector that may be described or referenced herein and does not represent a formal or official view of AQR. The views expressed reflect the current views as of the date hereof and neither the author nor AQR undertakes to advise you of any changes in the views expressed herein. 

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Charts and graphs provided herein are for illustrative purposes only. The information in this presentation has been developed internally and/or obtained from sources believed to be reliable; however, neither AQR nor the author guarantees the accuracy, adequacy or completeness of such information. Nothing contained herein constitutes investment, legal, tax or other advice nor is it to be relied on in making an investment or other decision. There can be no assurance that an investment strategy will be successful. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. Diversification does not eliminate the risk of experiencing investment losses.

The information in this paper may contain projections or other forward-looking statements regarding future events, targets, forecasts or expectations regarding the strategies described herein, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved, and may be significantly different from that shown here. The information in this document, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.