AQR changed one of its funds from carbon aware fund to combine domestic equities and managed futures. The Abbey Capital Multi-Asset Fund (MAFIX) and the Catalyst Millburn Hedge Strategy Fund (MBXIX) both do something similar (MBXIX has a little more going on under the hood). I found out about LSAIX from a Tweet by Corey Hoffstein who speculated that Man AHL and Alpha Simplex will also soon launch funds into this niche too.
We talk all the time about how difficult it can be to hold a managed futures-only fund. There can be long periods where the strategy appears to languish. I would argue it's doing what it is supposed to do which is have a low correlation to equities. If stocks are up a lot then I would not expect managed futures to also go up a lot. It could happen, but I would not expect it. The benefits of managed futures typically occur when something bad is happening in the equity market. It helps as what we've been referring to as a second responder.
The combining of equities and managed futures in the manner that these funds do typically has the effect of smoothing out the ride, of lowering volatility, less though with MBXIX. Looking at the three I mentioned versus 60/40 proxy, VBAIX, you can see that the difficulty of holding managed futures during bull markets mostly disappears.
And the year by year
I've told the story 100 times about Standpoint making contact with me a couple of months before the fund launched (I was not special, I simply responded because the idea immediately resonated). This type of fund might be as close to building a core position around an alt as I would be comfortable doing. The risk clearly is that in a year like 2022, managed futures "don't work" while equities are going down a lot but what I know of managed futures and studied, large drawdowns for managed futures haven't been anywhere near as big as large drawdowns for equities. Is that enough comfort for you? I don't know if it is enough for me but if it isn't enough for you then don't build a core position in a fund like this.
A quick note about the ReturnStacked US Stocks & Managed Futures ETF (RSST). That fund is part of this discussion too but it has 100% equities which gives it a higher volatility than the other funds in the short time since it listed.
And the other fund category to look at today is merger arbitrage which Barron's wrote about as a possible bond substitute. Ok, we've been making this point since the early days of the Obama administration but it's nice to see the idea getting more traction. Barron's believes that the new administration will be friendlier to certain types of mergers than the previous administration.
The idea makes sense but we'll see what the reality is. If the Biden era was not favorable for mergers, ok but the funds still acted the way I would expect which is as a horizontal line that tilts upward in a manner that I think most people hope bonds will behave.
One comment, always read the comments, did not see the appeal and two others replied in agreement. It seemed like he didn't understand the bond substitute point being made. The function it can play is to bring down a portfolio's overall volatility without the risk associated with fixed income duration. In 2022, the Merger Fund which I own personally and for clients was up 71 basis points. As for some others, ARBFX was down 1.02% in 2022, MNA was down 1.61%, VARBX was up 2.38% and HMEZX was up 2.7%.
I wouldn't build a portfolio with 60% equity and 40% merger arb because nothing is infallible but obviously I have been a big believer for a very long time.
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