Investing In Managed Futures

Includes: LSC, WDTI
by: Scott's Investments

I recently wrote a review of Mike Dever’s Jackass Investing: Don’t do it. Profit from it. Dever is a proponent of adding managed futures (among other assets/strategies) to portfolios in order to increase diversification. He provides four managed futures mutual funds in his book and action section of the book’s website - Altegris Managed Futures Strategy C (MUTF:MFTCX), Rydex|SGI Managed Futures Strategy H (MUTF:RYMFX), MutualHedge Frontier Legends C (MUTF:MHFCX) and Natixis ASG Managed Futures Strategy A (AMFAX).

Managed futures can be defined as alternative investments which take long and short investments in futures contracts and options on futures contracts. Managed futures can be accessed either directly with licensed CTAs (Commodity Trading Advisor) who are regulated by the CFTC (Commodity Futures Trading Commission) or via mutual funds and ETFs/ETNs that mimic managed futures strategies. When investing with a CTA a large minimum investment is typically required, making mutual funds and ETFs a more viable option for many investors.

Managed futures mutual funds tend to have relatively high fees and there are limited ETFs/ETNs in the managed future asset class - WisdomTree Managed Futures Strategy ETF (NYSEARCA:WDTI) and ELEMENTS S&P CTI ETN (NYSEARCA:LSC) are currently two of the only ETF/ETNs in the managed future world.

The fees on the four mutual funds recommended in Dever’s book are below along with the fees for WDTI and LSC (data courtesy of Morningstar):

Fund Load? Expense Ratio
MFTCX no 4.62%
RYMFX no 1.97%
MHFCX no 6.67%
AMFAX 5.75% 1.70%
LSC N/A 0.75%
WDTI N/A 0.95%

The expenses for managed futures mutual funds are significantly higher than a typical index equity or bond mutual fund and WDTI and LSC have higher expenses than many index based ETFs.

Managed futures typically have low correlations to other asset classes such as stocks, bonds, and real estate making them a potentially appealing asset class for investors seeking to improve diversification. An asset correlation matrix for the four funds listed in Jackass Investing along with LSC and WDTI is below. The funds are listed alongside ETFs representing some traditional asset classes – US Equities (NYSEARCA:SPY), bonds, (NYSEARCA:AGG), emerging markets (NYSEARCA:EEM), Treasury-inflation protected securities (NYSEARCA:TIP), Gold (NYSEARCA:GLD) and real estate (NYSEARCA:VNQ):

The managed futures funds have shown higher correlation among themselves and lower correlation to equities and REITs over the past 6 months.

Below is the performance of the four mutual funds and WDTI/LSC compared to SPY over the past year:

The performance over the past 5 years is below:

The managed futures funds have undererformed SPY in recent months, but if one is seeking low correlation to SPY then this is not surprising considering the recent bullish trends in equities.

If and when more ETF providers start offering exchanged based managed futures products, then fees should theoretically decrease. It is worth noting that in December ProShares filed for three managed futures ETFs. The hope is that with increased competition investors will have a wider range of strategies to select from in the managed futures class and less performance will be paid back to the fund sponsor in the form of fees with more performance returned to investors. Until then, investors who do not qualify for the minimums in CTA accounts are left with limited options in the ETF and mutual fund space.

Disclosure: No positions in funds listed.

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