Are stocks riskier than Managed Futures?
Truth be told, it’s not necessarily the investment vehicle that makes or loses money, but rather the individual or individuals managing it.
Stocks and Managed Futures are both investment vehicles employed by money managers as a means of earning profits. However, it’s important to remember that stocks in and of themselves are a single asset class regardless of its sector or capitalization category. Whereas managed futures generally encompass multiple, unrelated asset classes including stocks, bonds, metals, energies, commodities, agriculturals and more. Since all markets move in two directions, another significant difference is that managed futures can utilize Absolute Return Strategies, which provide the opportunity to profit whether the investment is increasing or decreasing in value, whereas stocks are a one-directional investment which only produces a profit if it increases in value.
Doesn’t it then stand to reason: it’s the money manager’s strategies, skills, abilities, and investment acumen that will determine investing results, not only the investment vehicle?
For informed, suitable investors in the financial position, many believe there is not a more versatile investment better able to properly diversify, enhance performance and reduce risk in an overall portfolio than professionally managed futures.
Professionally Managed Futures have outperformed every other asset class over the last 10 years while remaining relatively uncorrelated to them.
Managed futures investments can carry a significant risk of loss. Managed Futures trading is not appropriate for all investors. Past performance is not indicative of future results.
We encourage you to further educate yourself by reading the academic studies done by some of the world’s leading economists below. You be the judge.
Academic Studies on Managed Futures
The results of studies conducted in the past many not be indicative of current time periods or the performance of any individual CTA.
The Time Variation in the Benefits of Managed Futures
The academic paper, “The Time Variation in the Benefits of Managed Futures,” appeared in the Spring edition of “The Journal of Alternative Investments.” The report strongly supports much of the findings in previous studies on managed futures. Some of these points were brought out in the August 2003 edition of Managed Account Reports:
- Utilizing even a small allocation of managed futures limits portfolio risk by a statistically significant margin.
- The study confirms earlier findings that managed futures increases return and reduces portfolio risk.
- More conservative investors may gain even more from allocating a portion of their portfolios than more aggressive investors.
- Conservative portfolios experienced an increase in return in more than 50% of the years. The study went back 40 years.
- The risk reduction benefits of managed futures were quite pronounced. 98% of the years where managed futures were included in each portfolio, experienced an increase in the portfolio’s Sharpe ratio. The Sharpe ratio is a measure of risk management. The higher the ratio, the lower the risk.
Alternative Investing Benefits:
- Returns independent of Stock Market Performance
- Reduction of risk via portfolio diversification
- Have historically performed exceptionally well during stock market crises
(Black Monday - 1987, Iraq invades Kuwait – 1990, Russia defaults - 1998, DotCom crash – 2000, Terrorist attack – 2001, Credit Crisis 2007) - Low correlation to traditional investments such as stocks, real-estate, and bonds
Absolute Returns
The allure of Professionally Managed Futures lies in their ability to provide “Absolute Returns” regardless of conditions such as a strong or weak economy, low or high inflation, bearish or bullish stock market. And indeed, one of the key benefits of managed futures is this ability to profit in virtually any economic environment.
Not surprisingly, the amount of assets allocated to alternative investments such as managed futures (VAM's specialty) has increased dramatically over the past several years as investors search for alternatives to the stock and bond markets.
The Benefits of Managed Futures
by Thomas Schneeweis, Professor of Finance, University of Massachusetts
This academic study destroys the idea that managed futures as investments are riskier than stocks. According to Schneeweis “Managed futures are not any more riskier than traditional equity investments. Investment in a single commodity trading advisor is shown to have risks and returns, which are similar to investment in a single equity. Moreover, a portfolio of commodity trading advisors is also shown to have risks, and returns, which are similar to traditional investments.”
The study’s summary and conclusion states:
The results of this study provide important information to the investment community about the benefits of managed futures.
First, managed futures trade in markets which offer investors the same market integrity and safety as stock and bond markets. Managed futures investment, as for stocks and bonds, provide investors with the assurance that their investment managers work with a high degree of government oversight and self-regulation and trade primarily in closely regulated markets.
Second, managed futures are not more risky than traditional investments.
Third, most traditional money managers (and many hedge fund managers) are restricted by regulation or convention to holding primarily long investment positions and from using actively traded futures and option contracts (which offer lower transaction costs and lower market impact costs than direct stock or bond investment). Thus, in contrast to most stock and bond investment vehicles, managed futures traders offer unique return opportunities which exist through trading a wide variety of global stock and bond futures and options market and through holding either long or short investment positions in different economic environments (e.g., arbitrage opportunities, rising and falling stock and bond markets, changing market volatility). As a result of these differing investment styles and investment opportunities, managed futures traders have the potential for a positive return even though futures and options markets in total provide a zero net gain among all market participants. Thus managed futures are shown on average to have a low return correlation with traditional stock and bond markets as well as many hedge fund strategies and to offer investors the potential for reduced portfolio risk and enhanced investment return. As important, for properly constructed portfolios, managed futures are also shown to offer unique downside risk control along with upside return potential.
Simply put, the logical extension of using investment managers with specialized knowledge of traditional markets to obtain maximum return/risk tradeoffs is to add specialized managers who can obtain the unique returns in market conditions and types of securities not generally available to traditional asset managers; that is, managed futures.
The results of studies conducted in the past many not be indicative of current time periods or the performance of any individual CTA.
Facts and Fantasies about Managed Futures
by Gary Horton, The Wharton School of the University of Pennsylvania, and K. Geert Rouwenhorst, Yale School of Management
This study was published in 2004, a year which experienced one of the biggest jumps in new money entering managed futures from the previous year since 1980, according to the Barclay Group. With all the previous studies supporting managed futures, the conclusions of this study not only supported the previous studies but went even further in its support. This may have been one of the reasons why 2004 was a watershed year in regards to new money invested in managed futures! A September 9, 2004 Wall Street Journal article entitled, Commodities Enter Investment Mainstream brought out a key point in the Facts and Fantasies about Managed Futures study that apparently got investor’s attention: “During the past 45 years, commodity futures have had roughly the same return as stocks with less risk, have way outperformed bonds and are a better hedge against inflation than either stocks or bonds.”
The study’s summary states:
This paper provides evidence on the long-term properties of an investment in collateralized commodity futures contracts. We construct an equally-weighted index of commodity futures covering the period between July 1959 and March 2004. We show empirically that there is a large difference between the historical performance of commodity futures and the return an investor of spot commodities would have earned. An investor in our index of collateralized commodity futures would have earned an excess return over T-bills of about 5% per annum. During our sample period, this commodity futures risk premium has been equal in size to the historical risk premium of stocks (the equity premium), and has exceeded the risk premium of bonds. This evidence of a positive risk premium to a long position in commodity futures is consistent with Keynes’ theory of “normal backwardation.”
In addition to offering high returns, the historical risk of an investment in commodity futures has been relatively low – especially if evaluated in terms of its contribution to a portfolio of stocks and bonds. A diversified investment in commodity futures has slightly lower risk than stocks – as measured by standard deviation. And because the distribution of commodity returns is positively skewed relative to equity returns, commodities have less downside risk.
Commodity futures returns have been especially effective in providing diversification of both stock and bond portfolios. The correlation with stocks and bonds is negative over most horizons, and the negative correlation is stronger over longer holding periods. We provide two explanations for the negative correlation of commodities with traditional asset classes. First, commodities perform better in periods of unexpected inflation, when stock and bond returns generally disappoint. Second, commodity futures diversify the cyclical variation in stock and bond returns.
On the basis of the stylized facts we have produced, two conclusions are suggested. First, from the point of view of investors, the historical performance of collateralized investments in commodities suggests that commodities are an attractive asset class to diversify traditional portfolios of stocks and bonds. Second, from the point of view of researchers, there are clearly challenges for asset pricing theory, which to date has primarily focused on equities.
The results of studies conducted in the past many not be indicative of current time periods or the performance of any individual CTA.
Investor Safety is Paramount in the Managed Futures Market
Protecting the interests of all participants in the futures market is the responsibility of exchange and industry members as well as federal regulators. Working together, they ensure the financial and market integrity required by investors.
A brief overview of the Chicago Board of Trade (CBOT®) and it’s clearing service provider will illustrate why the credit risk of exchange-traded products is minimal for futures investors.
Learn about Broad Diversification Opportunities
Learn about Absolute Return Strategies
Learn about Non-Correlation to Stocks and Bonds
Contact a VAM Advisor
There is risk of loss when trading futures. Futures trading may not be appropriate for all investors.