Managed Future Funds Case Study

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The Forecast for Managed Future Funds
What caused managed futures amid poor performance, and how will manage futures perform in a rising interest rate environment?
Introduction
Recently, there has been speculation regarding the recent amid poor performance of the managed future industry. Consequently, initiating the question “is recent performance of managed futures a cyclical trough or a structural impairment”, and with interest rates reaching all-time lows, “how will manage futures perform in a rising interest rate environment?” This paper will explore possible implications that may have caused the recent struggles of the managed future industry, and discuss what the future may hold for such strategies in a rising interest rate environment.
Background
Until recently, managed futures strategies offered high probabilities to deliver positive returns, with very low correlation to equity and fixed income markets, and the ability to perform best during any financial crisis. When the dust settled on 2008, managed futures industry outperformed all other markets. Post-financial crisis, only two markets produced positive returns: managed future funds and fixed-income. The average manage future fund rose 18 percent, while many individual managed future funds were up 40 percent.1 Conversely, all other markets on average took a significant drawdown, US stocks declined 37 percent, REITs declined 37.34 percent, Int’l stocks declined 43.39 percent, and commodities declined 48.49 percent.2 Managed future funds positive performance in such a negative environment opened the eyes of many investors, and infused a rapid demand for managed future funds. Assets in managed futures strategies grew 120 percent from 2007 to 2011, totaling to 188 billion...

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...re sharply from one month to another. As depicted in the chart below, managed futures performance increased, while equity performance steadily declined. The equity sector out performed managed future as interest rates declined producing 1.0 percent returns on a monthly weighted average, while managed futures produced 0.14 percent. Conversely, however, as rates sharply increased managed futures returned 1.03 percent, while the equity sector was down -0.73 percent. The chart indicates that not only are managed futures agnostic to rate direction, but managed future funds are also uncorrelated to the equity market.
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Higher interest rates will also cause higher returns for the cash portion of managed futures portfolio. Although cash collateral cannot earn income, it in inclined to higher contribution in the managed futures portfolio.

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