How Managed Futures Fit into Your Portfolio
In a nutshell, what managed futures provide is an important non-correlated asset that any serious investor should have in their portfolio. Statistical studies—academic studies—suggest that that should be anywhere from 5% to 15% of a portfolio.
Some people say, “Well, it should be held for three to five years.” I would posit that it should be held as long as you own equities and/or fixed income in a portfolio, because of the diversification effects.
What we’re trying to do is to provide some stability. One of my colleagues likes to suggest that it’s the seatbelt in the portfolio. You get into a car, you’re in a high-performance car, you still want to put a seatbelt on in case there’s an accident.
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Bruising Year for Commodities Hedge Funds
The drop came as multibillion-dollar commodities hedge funds such as Blenheim, Clive Capital, BlueGold and Merchant posted double-digit losses for the year.
Some of the industry’s best-known managers were hardest hit. Blenheim, which has $5bn in assets, posted a loss of about 17 per cent, according to three investors. The fund, founded in 1988 by trader Willem Kooyker, suffered its worst month since inception in September, weighed down by bets on corn and aluminium, an investor said.
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Interview with Carlton Chin of CARAT / Adamah Capital
I truly believe that the best way to enhance diversification is through managed futures. A lot of hedge funds will use the same basic building blocks - using stocks and bonds - while managed futures uses everything from currencies to commodities. That really adds diversity to a portfolio.
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I love to look, especially for hedge funds and managed futures, at downside volatility. We can look at the standard deviation of the S&P 500, which over the past 30-plus years is 15.6 percent. Interestingly, if you look at the downside volatility, that is 11.7 percent. So the scary, or downside volatility, represents 75 percent of the overall volatility. This is one place where managed futures shines because based on a series of returns, mostly the BarclayHedge CTA Index but also my performance, the volatility has been 17 percent in total. The standard deviation is about 17 percent which is a little higher than the S&P 500 but if you look at just the downside volatility, when the performance for managed futures was negative, that number is just 10.1 percent.
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I’ve been lucky to work with some folks at the University of Chicago -- and Frank Vannerson was from Princeton. These academic studies can add credibility as well, and show that managed futures/alternative investments have benefits.
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Carlton Chin is chief investment officer and head of research at CARAT/Adamah Capital LLC, a fund manager and CTA focused on systematic managed futures strategies. An investment professional since 1990, he spoke with Managed Futures Newsletter editor Jim Kharouf about his start in the business, whether markets change and how he looks at volatility.
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