In a turbulent year for stocks and bonds, mutual funds taking an investment approach that benefited from both the bear market for bonds and the bull market for commodities are generating excellent returns.
So-called managed term funds follow the maxim that “the trend is your friend”. They implement trend-following strategies in the futures markets, using quantitative models to take long and short positions in four major asset classes around the world: stocks, bonds, commodities and currencies.
“Trend following can be simply described as going long in markets that are rising in price and going short in markets that are falling in price,” said officials at AQR, which runs the
AQR Managed Futures Strategy
funds (ticker: AQMNX), wrote.
The funds offer investors who tend to focus on stocks and bonds a way to gain exposure to over 100 different futures markets, including relatively obscure markets such as European natural gas and interest rates. Eastern European interest.
Managed futures funds have averaged a return of 16% in 2022 through May 20, according to Morningstar, and are meeting their goal of providing diversification benefits when equity markets struggle.
Natixis’ $2.5 billion
AlphaSimplex Managed Futures Strategy
fund (ASFYX) is up 29%, and the
Pimco Managed Futures Strategy
(PQTAX), the largest of the group at $3.2 billion, gained 15%.
These are some of the highest yields in the mutual fund industry. the
S&P 500 Index
fell 16% this year, and the
iShares Core US Aggregate Bond
the listed index fund (AGG) is down 9%.
|Funds/Ticker||Year-to-date total return||3 years. Full return||5 years. Full return||Total assets (billions)|
|Pimco Trends Managed Futures/PQTAX Strategy||15.2%||13.3%||9.2%||$3.2|
|American Beacon AHL Managed Futures Strategy/AHLYX||13.3||9.6||7.5||3.2|
|AlphaSimplex Managed Futures Strategy/ASFYX||29.2||16.2||9.2||2.5|
|Abby Capital Futures Strategy/ABYIX||14.4||10.1||6.2||2.2|
|LoCorr Macro Strategies/LFMAX||13.9||9.3||5.8||2.0|
|AQR Managed Futures Strategy/AQMNX||26.3||7.2||3.4||1.4|
|S&P 500 Index||-16.1%||14.0%||12.6%||—|
|IShares Core US Aggregate Bond ETF/AGG||-9.3||0||1.1||—|
Note: data as of 05/23/22; 3- and 5-year total returns are annualized
Sources: Morningstar; set of facts
Most investors do not short sell stocks or bonds or participate in commodity markets. Managed term funds offer a disciplined way to gain this exposure. Funds do best when there are strong trends to exploit, including the fall in global bond markets this year, rising commodity prices and a stronger dollar. Turbulent markets, however, can lead to negative returns.
“When markets go from good to great or bad to worse, that’s when these strategies tend to shine,” says Yao Hua Ooi, who co-manages the AQR Managed Futures Strategy fund, up 26 % so far this year.
“The strategy holds winners for a long time and weeds out losers quickly, so losses tend to be smaller,” says Matt Dorsten, a Pimco fund manager.
Dorsten says the Pimco fund has had a negative correlation with the S&P 500, which supports the diversification argument.
This year’s large gains in managed term funds follow a multi-year period of uneven returns. With the exception of the Natixis fund, the funds have underperformed the S&P 500 over the past three years, and all have trailed the index over five years. But they are comfortably ahead of the bond market.
Term funds under management hold approximately $18 billion. They are among the largest liquid alternative funds, which seek to offer individual investors access to strategies long practiced by institutions, including long/short equity. Commodity trading advisors have been using trend-following strategies for decades.
If stock and bond markets are going through a period of volatile performance like in the 1970s, trend-following strategies can continue to find markets to tap into. “We are able to change positioning over time and adapt to different opportunities in a macro environment with higher inflation than most investors have seen in 40 years,” says Katy Kaminski, fund manager of AlphaSimplex Managed. Futures. “The game changes and what works is different. Most investors are biased towards being long in stocks. It works normally, but sometimes it doesn’t.
Kaminski says the fund did well in early 2020 when stock markets were hammered. It was long bonds and short oil and other commodities after the hit of the Covid pandemic, the opposite of recent positioning.
Simon Scott, director of global alternative ratings at Morningstar, said funds hit a “sweet spot” this year as commodities rallied and bonds crunched. Stock markets, although down around the world, did not contribute much to fund performance as movements were more choppy.
Regarding the benefits of diversification, Scott says, “There is nothing in the structure that indicates they will go up when stock markets go down. A lot of people think there’s some kind of magic lever they’re pulling.
Additionally, annual fees are relatively high, at 1.75 percentage points on average, due to the technology and personnel required to implement the strategy.
Some trends that funds have exploited this year in bonds, commodities and currencies have recently reversed. But strong fund returns have strengthened the case for diversification.
The idea behind managed term funds was championed over two centuries ago by British economist David Ricardo, who is said to have said, “Cut your losses, let your profits run.” It seems as relevant today as it was in the 1800s.
Write to Andrew Bary at [email protected]