If I’ve learned anything about the markets in the last decade, it’s that they are anything but rational. Investments that appear to be expensive are traded higher while those with reasonable valuations languish. Although I’m an advocate of fundamental analysis, I’ve been searching for an opportunity to take advantage of this irrational behavior.
Enter Managed Futures.
The benefit of Managed Futures comes from the material improvement in the downside deviation.
–Longboard Asset Management: The Case for Managed Futures
Managed Futures are a form of trend following that allows for profiting from the direction of the ‘herd,’ but what makes it most interesting is that it is direction agnostic; up or down it’s possible to benefit. I’ve used sparingly used Managed Futures in the past, but was never quite satisfied with the performance. Because short hold periods are susceptible to volatility, even when the trend direction was correctly identified, the price movements rendered positions unprofitable. Some companies are avoiding this tendency by holding for much longer time periods than what is typical for the managed future strategy (12-16 months vs weeks), unfortunately, this is usually reserved for those who play in the hedge fund world.
Another interesting aspect to managed futures is the way the contracts are collateralized. Treasury Bills and other high quality short term investments are used to secure the portfolio of futures which, in a period of rising interest rates (a trend), would contribute additional income to the portfolio while also profiting (hopefully) from the decline in bond prices (as a result of the rising interest rates).
Fortunately, I recently met with a company with a fund that is doing exactly what I’ve described (I won’t mention names for compliance disclosure reasons) and will be integrating them into portfolios in the coming weeks (See disclosure in the below).
If you are not already a client (because if you are I’m familiar with your plan) , I’d like to hear your strategy for combating a declining market/ and or a rising interest rate environment.
Not sure what to do? Send me a message or ask a question in the comments below.