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By Josh Charney, CFA | 01-15-2014 02:00 PM

The Case for Managed Futures

The AQR Managed Futures management team--Morningstar's 2013 Alternatives Fund Manager of the Year award winner--describes what the fund's diversified trend-following approach can add to a portfolio.

Josh Charney: Hi, my name is Josh Charney. I'm an alternatives analyst here at Morningstar.

Joining me today I have Brian Hurst and Yao Hua Ooi from AQR Managed Futures; they are the winners of the Alternatives Fund Manager of the Year award for 2013.

Thank you guys for joining me today.

Brian Hurst: Thanks, Josh.

Yao Hua Ooi: Thanks.

Charney: Brian, for those at home, what exactly are managed futures and what exactly is a managed futures fund?

Hurst: Managed futures is a trend-following strategy. It invests both long and short in global equity, fixed income, commodities, and currency markets around the world. By being able to go long and short based on trends, meaning, go long markets that have been moving up in price, going short in markets that have been falling, it's able to profit in both up and down markets.

Charney: For those listening at home that are thinking of investing in managed futures, what is the case to be made to invest in managed futures funds, like the AQR Fund?

Hurst: What we found historically is that trend funds strategies tend to do pretty well when there is a big equity drawdown. So when you combine it with people's typical portfolios, which will hold 50% or more in equities, that helps smooth the ride out.

Charney: Brian, why does trend following work?

Hurst: What we find is--and what we believe--it's mostly behavioral biases: the fear and greed cycle. People tend to under-react to news and information, allowing managed futures funds to get in trends early on, and then profit when people ultimately overact and do performance-chasing and things like that.

Charney: Yao Hua, these funds did fairly well in 2008. Can you give the people at home [a sense of] why that might have been the case.

Ooi: 2008 was a great environment for trend-following strategies. Trend-following strategies in general tend to do best when things either go from good to great or from bad to worse. And as we all remember, 2008 was definitely a case when the economy and global financial system went from a bad situation to a very severe situation, especially in the last half of the year.

A trend-following strategy was able to profit from the sustained trend by going short in the majority of risky markets, such as commodities and equities, and going long in the safe haven assets that did well that year, like Treasury markets and gold markets.

Charney: So, you are saying there was a bull market in negative trends when the stock market was going down, and that's how managed futures funds were able to profit?

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