Managed futures have become an alternative asset class that is widely used by investors seeking overall portfolio diversification and absolute returns independent of the direction of broad equity and bond markets, according to a study by alternative investment managers Steben & Company.
In a new white paper examining the performance of managed futures funds, the firm writes: “The most common managed futures trading strategy is trend following, a strategy that attempts to exploit momentum in more than 200 global futures markets (including commodities, equities, fixed income, and currencies) by taking long positions in rising markets and short positions in falling markets.”
Steben writes that while investors have embraced the potential benefits of managed futures, the causes of the large performance dispersion among trend following CTAs are not well understood given that their trading programs are conceptually similar.
Their study found that style factors including volatility targets, speed and sector exposures explain many of the historical short-term performance differences among trend followers.
The returns cited by Steben found that there is a lack of persistence in achieving top quartile returns among CTAs.
“Despite the lack of persistence, there are major differences in the quality and sophistication of trading systems among trend followers, and these can manifest themselves in long run performance differences. Managers with a stronger focus on research, risk management and trade execution are more likely to have better performance when measured over multiple market cycles. But in a single year the wide dispersion in managed futures fund performance cannot be explained solely by differences in manager skill or ‘edge’. Instead, we found that style factors explain most of the performance differences between managers in a given year. Just as long-only equity funds may have a particular style tilt (value vs. growth, large cap vs. small cap), trend following CTAs also have style biases.
“In the traditional investing world, a small cap growth equity fund manager may outperform a large cap value manager in a particular period, not because he or she has greater stock selection skill, but simply because small caps outperformed large caps and growth outperformed value. Similarly, in managed futures, a trend following program’s style choices can be the key drivers of short-term relative performance compared to its peers.”
The firm concludes that in trend following strategies, the three most important style differences are volatility targets, speed and sector exposure.
