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2012 Managed-Futures Category Review and 2013 Outlook

Another poor showing for trend-followers. 

Mallory Horejs, Alternatives Analyst, 02/05/2013

For the second-consecutive year, managed-futures mutual funds posted large losses, tumbling 7.4% on average in 2012. Frequent reversals in the price trends of futures contracts in all asset classes during the past few years have led to a disappointing debut for this young category of price-momentum-following funds. Commodity-focused strategies were hit particularly hard in 2012, following sharp midyear price-trend reversals across several commodity contracts, including agriculture, industrial metals, and energy products. Forward Commodity Long/Short Strategy FCMLX and Guggenheim Long/Short Commodities Strategy RYLBX each lost roughly 25% during the year, landing them at the bottom of the category.

Poor performance did not quell investors’ interest in these strategies, however. The managed-futures category still received inflows of $811 million in 2012, not as significant as the flows in prior years ($4.37 billion in 2011 and $1.65 billion in 2010) but still notable. Positive flows are a good sign, indicating that individual investors and financial advisors are strategically constructing their portfolios to capture the long-term benefits from these uncorrelated managed-futures strategies rather than simply chasing performance. Managed-futures strategies have historically been uncorrelated with traditional asset classes and have provided insurancelike payoffs, making them a very attractive addition to a portfolio (the most dramatic example being 2008, when the average managed-futures hedge fund in Morningstar’s database returned more than 19%).

Mutual fund companies clearly haven’t lost hope either. In fact, 22 new managed-futures mutual funds came to market in 2012, bringing the tally up to 49 constituents. Investors have more choices than ever before, making their allocation decisions even more confusing. Here are some pointers.

The Trend Is Not Always Your Friend
The category’s poor performance since 2008 isn’t all that surprising—most trend-following strategies seek to capture (take long or short positions in) long-term (six- to 12-month) price trends in various futures markets. The short-term risk-on/risk-off mentality of investors postcrisis has resulted in problems for longer-term trend followers—trends are harder to identify, and they are often caught on the wrong side of a trend (being whipsawed). As it’s not certain how long this environment will last, it behooves investors to choose a managed-futures fund that incorporates at least some nontrend or short-term trend strategies.

Here are some examples: AQR Managed Futures Strategy AQMIX, up 3.0% in 2012, incorporates a shorter-term (one- to three-month) trend component; Pyxis Alpha Trend Strategies HATYX,up 0.7% last year, mixes in a countertrend (mean reversion) strategy; 361 Managed Futures Strategy AMFQX, up 11.2%, follows a predominantly countertrend strategy; and TFS Hedged Futures TFSHX, up 8.3% last year, follows a fundamentally based quantitative futures strategy.

Price Matters
Besides avoiding longer-term, price-trend-following strategies, a key theme connecting 2012’s top performers is lower fees. Many of the newer managed-futures mutual fund products are funds of multiple CTAs, or commodity trading advisors, or single-manager CTAs. These funds advertise best-in-class managers but also charge high-flying fees: 1%-2% mutual fund management fees, 1%-2% CTA management fees, and 20%-35% CTA performance fees. Morningstar’s research has illustrated time and again that lower fees contribute to above-average mutual fund performance, and 2012 supported that claim in the context of managed-futures funds.

Three of the category’s top funds from 2012 are by no means cheap, though. 361 Managed Futures Strategy, TFS Hedged Futures, and Pyxis Alpha Trend Strategies charge 2.40%, 2.30%, and 2.00%, respectively, more than other alternative strategies in similar share classes. AQR Managed Futures Strategy’s annual report net expense ratio of 1.25%, however, is hard to beat (as is the fund’s N shares, priced at 1.5%).

Looking forward, managed-futures funds’ long-term success will depend primarily on the market environment and the presence of sustainable price trends across various asset classes. In challenging market environments, though, the lower-cost managed-futures funds will likely have a leg up on their pricier peers.

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