Alts Democratized: A Practical Guide to Alternative Mutual Funds and ETFs for Financial Advisors, + Website

Chapter 11Alternative Managed Futures Funds

Synopsis

Alternative Managed Futures Funds offer noncorrelated returns that help diversify portfolios, and this makes these funds unusual among liquid alternatives, which usually have high exposure to equities and other traditional risk factors. This classification also stands out for being relatively homogeneous, since the funds are driven by many of the same trend-following algorithms. Poor returns in recent years have convinced some investors that managed futures funds are merely a bear market hedge. This is misleading, however, since these funds can offer valuable diversification benefits, and the blockbuster success of AQR Capital shows the rewards of consistently strong performance. High fees remain a challenge for this classification, and can make these funds an expensive tool for diversification.

Definition

Funds that invest primarily in a basket of futures contracts with the aim of reduced volatility and positive returns in any market environment. Investment strategies are based on proprietary trading strategies that include the ability to go long and/or short.

Definition of the Lipper classification: Alternative Managed Futures Funds

Volatile returns have made managed futures a controversial strategy. The classification's rock-star outperformance in 2008 and the subsequent underperformance have created confusion about its role in a portfolio: Is it a bear market hedge or an uncorrelated strategy? As we discuss in this ...