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By Josh Charney, CFA | 06-21-2012 01:30 PM

A Primer on Managed Futures

Altegris' Matt Osborne explains the reasons behind the growing popularity of managed-futures strategies and how investors should approach these types of funds.

Josh Charney: Hi, my name is Josh Charney, and I am alternatives analyst here at Morningstar. I'm here at the Morningstar Investment Conference, and joining with me today is Matt Osborne and he a portfolio manager at Altegris. Thank you for joining me today, Matt.

Matt Osborne: Thanks, Josh.

Charney: So managed futures have definitely seen record inflows of $3.6 billion in 2011, and can you just quickly explain to some of our viewers at home what exactly is a managed-futures fund?

Osborne: Sure, Josh. A managed futures investment strategy is primarily a momentum or trend-following-based investment strategy. Professional money managers that trade managed-futures portfolios are typically running very diverse portfolios of global futures contracts and invest in those contracts both long and short across the world's four major asset classes. So the portfolios are typically diverse and include futures contracts that are based on global currencies, commodity markets, global equity indexes, and global fixed-income markets. Primarily a managed-futures fund will have the predominance of its exposure in the financial futures with about 25% or 30% in commodity futures typically.

Charney: We all know that managed futures did terrific in 2008, but since then, the showing has been relatively sloppy in terms of performance figures. Can you kind of explain why we've seen sloppy performance from managed-futures funds?

Osborne: Sure, Josh. First of all I'd like to contextualize the long-term performance in managed futures, which over 20-plus years the index that Altegris runs, Altegris 40 Index, has annualized at about 9% per annum, which is very similar, slightly above actually the S&P 500 with dividends reinvested, but managed futures has achieved that absolutely rate of return with lower standard deviation than a stock market, a standard deviation of about 11% compared with the S&P's 15%. And of course it's also done so with a much lower worst drawdown statistic. Managed futures' worst losing period was about 15% versus the S&P's 50% drawdown of course in 2008 and 2009.

The recent performance over the last three years has indeed been relatively flat. The main reason for that has been the continual risk-on, risk-off environment that we've seen, and as I mentioned, managed-futures managers are typically trend-following in nature. We simply have seen rapid trend reversals during the last two or three years.

Charney: Morningstar did a survey with Barron's in 2011, and it showed that advisors overwhelmingly are very interested in investing in managed futures. Can you kind of explain what you think the motivation is driving this interest?

Osborne: Yes, there's really two main facets to that, Josh. The first is that absolute rate of return that has historically been a good rate of return in managed futures, the last couple of years notwithstanding. But the primary benefit of managed-futures investing is simply the noncorrelation. Managed-futures investing is uncorrelated with the stock market; it really has about a zero long-term correlation. And in the context of a diverse portfolio of asset allocations, managed futures has a provided really great diversification benefit in investor portfolios.

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