Miserable Underperforming Managed Futures Had A Banner Quarter

RCM Alternatives posted a quick note highlighting the strong quarter put in by the managed futures strategy. Very simply, managed futures is a trend following strategy that usually involves commodity futures and can also involve currency futures, financial futures, not usually equity futures and I believe it is correct to say not quite yet for Bitcoin futures but maybe that will come.

I've been interested in and writing about manage futures since before the Financial Crisis. Back then the only fund I was aware of was the Rydex Managed Futures Fund (RYMFX). That fund still exists but has had a name change or two and is now known as the Guggenheim Managed Futures Strategy Fund and still has it's old Rydex symbol. 

I was first attracted to the fund because the strategy has the tendency to have a negative to low correlation to equities. So when equities go down it should hopefully go up. If that's true, and it has been, then when equities go up, managed futures could very well go down which it has most of the time. During the raging bull market that started after the Financial Crisis, managed futures' performance in nominal terms has floundered. I saw quite a few articles over the years bagging on the strategy saying it no longer worked. Several times I wrote about or Tweeted that if you understand correlations, something that is supposed to have a negative to low correlation to equities is going to do poorly when equities do well so it's pretty much done what it's supposed to do the vast majority of the time. That sort of reliability is a fantastic attribute even if it's a suboptimal holding. 

So after a rough quarter for equities, checking in on managed futures makes sense and not surprisingly, when equities went down, managed futures went up. It's no better than it was, it has continued to maintain it's negative to low correlation to equities. 

This background allowed me to immediately understand BLNDX (client and personal holding) that I've been writing about for a little over two years and to immediately have faith in the strategy which is to blend equities and managed futures in one fund. 

One wrinkle that could give a boost to managed futures is interest rates on T-bills. The nature of a fund that uses futures contracts is that it will have a lot of cash in T-bills. Part of the long term performance going into the Financial Crisis came from T-bill yields that no longer exist but might be coming back. Go to Morningstar's year by year returns for the fund and then (sort of) counterfactually add another 200 basis points or 400 basis points whatever you think could be coming from T-bills when the tightening cycle ends. While simple extrapolation is too simple it likely adds basis points to the return every year. I should note though that while I believe there is something to this idea, the two or three experts I've asked about this over the years have all said they didn't think this was noteworthy. I disagree but I could be wrong. 

I threw gold into the chart because it should go up when equities go down and while it does not always do that, it did in the first quarter. I always say gold tends to go up in down markets more often than not and often enough for me to believe in it. Bitcoin is in there too, showing IMO there is nothing reliable about it in a down market for equities. Not that you shouldn't speculate on it just that for now it doesn't really hedge anything.