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By Christine Benz and Jason Kephart, CFA | 01-20-2016 12:00 AM

Should You Own a Managed-Futures Fund?

As their relatively strong returns this year illustrate, managed-futures funds can add diversification to a portfolio--in moderation, says Morningstar's Jason Kephart.

Christine Benz: Hi, I'm Christine Benz for Amid a sliding equity market, managed-futures funds have actually posted gains. Joining me to take a closer look at the category is Jason Kephart--he is an analyst with Morningstar's manager-research group.

Jason, thank you so much for being here.

Jason Kephart: Thanks for having me.

Benz: Jason, before we get into what has been driving these funds' relatively strong performance recently, let's get into what they do because they are quite different from plain-vanilla equity and bond funds.

Kephart: Yes. Of all the alternative categories at Morningstar, managed futures is probably the most alternative. These funds are basically pure momentum vehicles. They are going to bet on trends in equities, bonds, currencies, and commodities, and what really makes them unique is that they can follow trends down as well as up. So, when equity markets are crashing, these funds could be short those asset classes.

Benz: So, they make these bets using futures?

Kephart: Yes, using futures contracts. They tend to be pretty high turnover because trends obviously can change pretty quickly, and they will get more invested in a trend the longer it runs. And yes, it's definitely something that's a little bit different from what someone is probably used to.

Benz: So, are most of these funds quantitatively driven? They have managers, but are the managers relying on quant models to help determine which way the wind is blowing?

Kephart: Yes, it's all systematically driven. They are getting new data every day, and that's kind of informing the portfolio positions. There is no manager overlay saying, "We think this is going to happen." It's all based on what's already happened. They are basically betting that what's gone up today will go up again tomorrow and what's gone down today will go down again tomorrow.

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