Managed futures improve risk diversity

04-Mar-2016

By Sarah Kendell

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A wide opportunity set, strong liquidity and a lack of correlation to traditional asset classes can make managed futures an important tool for portfolio diversification, according to Aspect Capital.

Speaking at a media briefing in Sydney yesterday, Aspect Capital research director and president Martin Lueck said managed futures managers could trade in traditionally harder to access markets such as energy, commodities and currency.

This made the strategy a great source of risk mitigation in the event of negative movements in uncorrelated markets like equities and bonds.

“As well as a drop in their portfolio of 30 or 40 per cent, many investors in what were traditionally thought of as ‘diversified’ portfolios found in the 2008 crisis that liquidity completely dried up,” Lueck said.

“Managed futures actually generated strong positive returns through the financial crisis, and our investors could access their funds at any time they wanted to.”

The strategy involved capturing medium-term price trends across financial markets, such as the current declines in oil and natural gas, which often occurred when market participants reacted at different speeds to market events.

“The trend-following strategy isn’t actually about an anomaly in markets but more to do with the speed with which investors like sovereign wealth funds can make adjustments in their strategies to account for price declines,” Aspect chief executive Anthony Todd said.

“Crowd behaviour is a consistent factor in financial markets historically, and we capitalise on this rather than trying to predict long-term macro themes.”

Lueck said the group strategy was appealing to Australian investors and advisers seeking a risk mitigation portion to their portfolios.

“A consistent theme in the discussions we’ve been having with advisers is whether fixed income will be able to provide that counterbalance it has previously provided in a challenging equities market,” he said.

“Given the compression of bond yields we have been seeing, it makes sense for investors to look at other strategies for risk mitigation like short selling, arbitrage and managed futures.”

Lueck pointed out that the CISDM CTA Equal Weighted Index, a commonly used benchmark for managed futures specialists, outperformed Australian equities in all but one major market event since 1980, while it generated positive returns in 18 market events.

“In the current market environment, advisers have to find diversification outside traditional sources, and we firmly believe that managed futures can reduce risk in their client portfolios.”

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