3 Trends That helped Alternative Managed Futures Funds earn solid returns during 2014 and Q1 2015:
Excerpt from full post on the Convergex Blog.
3 trends that helped Alternative Managed Futures Funds earn solid returns during 2014 and thus far in 2015:
Short global currencies: This is a by-product of the stimulus measures adopted abroad, while the Fed moves in the other direction (at least for now). The most notable example is the weakening of the Euro against the U.S. dollar as the European Central Bank launched a $1.1 trillion quantitative easing program in March. Over the past 12 months, the Euro fell against the U.S. dollar from 1.39 on May 6th, 2014 to 1.13 currently, after reaching a low of 1.05 in March.
Long longer-dated fixed income: Two major plays involve the German bund and 10-year Treasury yield as the European Central Bank eases and the Fed’s signal to hike rates has yet to materialize. For example, during the last year, the 10-year German bund yield dropped from 1.5% on May 6th, 2014 to 0.6% as of yesterday’s close, after falling to a low of 0.2% in March. Likewise, the 10-year Treasury yield was 2.6% on May 6th relative to 2.2% currently after declining to a low of 1.7% in February. Previously, finding trends to follow was challenging since there were smaller spreads along with low interest rates.
Short oil prices: Managed futures captured the slide in oil prices since last June. For example, WTI crude oil prices slumped from an average of $108 a barrel to an average low of $46 a barrel this past January according to the World Bank (although it has since risen to $61). In similar fashion, Brent crude oil prices started at an average of $112 a barrel in June, dropped to an average of $48 in January, and currently resides at $67. Many managed futures funds shorted both, catching the ride down. Yes, energy has snapped back in recent weeks – we’ll have to wait for Q2 results to see which managed futures funds caught that move. Regardless, the volatility of energy markets is a clear opportunity for these types of funds.
We recognize these trends started to reverse in Q2, but what did their emergence produce in terms of returns for Alternative Managed Futures Funds? Here is a breakdown of performance for 2014 and Q1 2015:
In 2014, Alternative Managed Futures funds returned 9.6% on average according to Lipper, a little under the S&P 500’s price return of 11.4%. This classification earned 5.9% during Q1, outperforming the S&P 500 (+0.4%). The average 3-year and 5-year annualized returns ending in 2014 is just 1.4% and negative 0.7% respectively. However, while there were only three funds in existence during 2008, they gained 8.3% on average.
Last year, the top 5 funds earned an average of 20.5%, while the bottom 5 lost 4.2%. In the first quarter, the five best performing funds returned 11.8% compared to negative 0.2% for the worst five performing funds.
In the first quarter, Alternative Managed Futures Funds already received $2.2 billion in net flows and total net assets grew to $18.2 billion. This exceeds the positive net flows accumulated in each of the last three years. If this level keeps pace, this year could rival 2011’s net flows of $4.6 billion. This outcome will rest largely on returns: over the past year ended on March 31st, this classification gained 20%, bringing the 3-year and 5-year annualized returns up to 4.1% and 2.5% respectively. Should these funds continue to deliver, the flows will follow.
Like most liquid alts, Alternative Managed Futures Funds tend to lag during bull markets since they are supposed to have a low correlation to traditional asset classes, or zig when the market zags. However, managed futures offers diversification benefits to portfolios, particularly for those largely exposed to U.S. equities. Interest in uncorrelated assets typically wanes during cycle highs, but a managed futures strategy can help improve risk adjusted returns by limiting losses—or creating higher lows—thereby gaining higher net returns over time. So even with some lackluster performances when equities excel, this strategy may prove useful during tail risk events – like in 2008.
