Fear Of Commitment

Price Action Lab had a blog post that amusingly referred to managed futures as being a long term commitment. That led to an older post that tried to figure out the optimal allocation to managed futures. 

Basically, they said to get the highest return you should have zero in managed futures and if you want the best Sharpe Ratio (risk adjusted return) you should have 75% in managed futures. The 75% number was put out there in jest....I think. The more serious point was the human behavior of wishing you owned less when equities were ripping higher and wishing you had more when equities were falling, except this year? 

First as a reminder, I would never have anywhere close to 25% in managed futures but the point of the chart I built is to show that there may not be a single optimal allocation to managed futures that will work in all seasons. With all four of the above being backtested, the returns were driven by equity allocations, 65% in equities will hopefully outperform 60% in equities and so on. I couldn't get the 25/75 blend to the highest Sharpe Ratio so I am not sure how Price Action Lab got there. 

As someone who thinks managed futures is a great diversifier that is pretty reliable (not infallible), I view it as potentially a source of crisis alpha with a low to negative correlation to equities. In that light, 20% or 25% makes no sense to me. We talked at length in 2022 and into 2023 when managed futures was booming and people were coming out of the woodwork to suggest huge weightings to managed futures which I said was a bad idea back then and is a bad idea right now in terms of constructing a portfolio. If you are trying to trade a bottom, I have no idea what someone should do. 

There are some funds that blend managed futures in with other things. There are different funds that do this with different effect that may or may not be additive depending on how you view things. BLNDX is one that I think blends it in with an additive (positive) effect and there are other funds I believe don't blend managed futures in with a positive effect.

Most client accounts have a stand alone managed futures fund and the weight is low single digits. Most client accounts also own BLNDX in a similar weighting. I think of BLNDX' outcome as benefitting from managed futures more than being a proxy for managed futures but anyone else might think of it differently.

I am confident that in the next crisis managed futures will work but a little bit can go a long way. Spreading across several holdings that can offer crisis alpha instead of concentrating on just one makes for much better diversification and offers much more resilience as this year has clearly shown us. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.