The Managed Futures Pinnacle Awards honored the best of the managed futures industry in Chicago June 24. The event spotlights recent successes for Commodity Trading Advisors (CTAs) in an area of investing not always known or understood – an alternative to equities and bonds that includes positions in commodity and financial futures markets.
In the investing industry, where success is usually determined by returns, an awards ceremony might seem like a vehicle to reinforce what we already know. It’s a point not lost on Sol Waksman, founder of BarclayHedge, which co-sponsored the Pinnacle awards with CME Group.
“Every time I look at a performance table, I’m reminded that ‘Past Results are Not Indicative of Future Returns’ in 16 point boldface type. Why do these awards even matter?” Waksman asked rhetorically in his opening remarks at the event.
“Why might it matter? All of the CTA programs that qualify for inclusion in the awards were ranked by weighted scores on five variables; length of performance history, returns, downside, correlation to relevant indices, and risk adjusted returns.”
In other words, it’s not just returns that determine a good managed futures fund.
The Pinnacle awards look at the best CTAs of 2014, and also the best performing over the previous three and five year periods. In all, 15 awards were presented, including the night’s top prize, the Pinnacle Achievement award, to Clifford Asness of AQR Capital Management.
Cliff Asness of AQR Capital Management won the Managed Futures Pinnacle Achievement Award.
A Growing Industry
Commodity Trading Advisers are the managers of these funds that collectively have about $330 billion in assets under management. While that is a staggering number, the industry is still very much in the early phases of its growth by investing standards.
Most investors are familiar with mutual funds, which follow securities like stocks and bonds – and rise and fall with those markets. Managed futures, on the other hand, follow trends, and can produce returns in any market. Take 2008, for example, when equities markets tanked. Managed futures saw a better than 14 percent return that year, according to BarclayHedge CTA Index. In recent years, returns have been mixed – down for most of the 2009-2013 period, and returning in 2014 with a better than 7.5 percent return, according to BarclayHedge.
Assets under management (AUM) in the industry have grown exponentially in the last few decades. In 1980, when BarclayHedge first began tracking the data, managed futures AUM stood at about $300 million. With few exceptions, assets have increased every year since.
Following the great 2008 year, AUM shot up dramatically – in all about $123 billion between 2008-2013, according to BarclayHedge.
That doesn’t mean the industry hasn’t had its challenges. In a recent podcast interview with CME Group, Asness reminded listeners that capital flows into managed futures have not always increased, and that there is potential for further growth.
“Managed futures, everyone talks about flows post-2008. But through a long fallow period, flows were negative,” he says. “The flows have not been net a mad rush to managed futures, so I think there’s room to grow.”
The mix of returns in recent years speaks to one of the key differentiators of managed futures – its non-correlation to equity or bond markets. For an industry still growing, it’s a point worth repeating for CTAs.
“Most of the managed futures space growth is going to come from people looking for non-correlation to the equity markets,” says Matt Peluse, founder of Esulep Management, which won the Pinnacle award for 3-year best hybrid CTA.
Peluse says defined benefit plans such as pensions are one area that he could see turning more to managed futures.
“Defined benefit plans are looking for a return that fixed income cannot give them right now,” he says. “Their choice has been to turn to the equity markets. However if the equity markets go sideways or down, they need some sort of non-correlation in order to provide that 5-7 percent defined benefit, so the CTA space is a great product for them.”
Future growth in managed futures may come as investors become more familiar with it, and understand how its non-correlation properties differ from other investments.
“It’s clear that the industry is doing something different than everyone else, “ says Sanjiv Kumar of FORT L.P., the Pinnacle winner for 5-year Best Diversified CTA with more than $500 million AUM. “Most hedge fund strategies are convergent in nature, where they are looking for some mispricing to correct itself, whereas most CTA strategies are looking for the world to move from one equilibrium to another.”
Asness also touted the capabilities of managed futures both as a risk reducing product and a producer of returns.
“We think managed futures is actually a risk-reducing product,” he says. “There are no guarantees. But managed futures by its nature is built in stop loss, when it’s losing it takes off positions. It’s a trend following strategy. It’s done well more often than not when the markets have done poorly.”