Managed-Futures Funds Vulnerable to Market Turbulence
Last month was a standout for the category, but their current general positioning means they could be hit hard by a market correction.
The current general positioning of managed-futures funds is vulnerable to a market correction, and here is why.
Sustained directional upside or downside market movements determine managed-futures funds’ positioning. Most of these systematic trend followers use multiple models that combine different look-back periods, creating "time diversification." In other words, managed-futures funds’ short-term models enter the market first as a trend develops, and medium-term and long-term models follow. This helps managers to gradually enter and exit the markets, take profits, and ride trends successfully. Model agreement across the various time periods is also an important input for managed-futures funds’ asset allocation, subject to a fund’s risk target.
Tayfun Icten does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.