3:34 PM PT
Olympia, WA
Trend-following managed futures is a strategy that we like and that we utilize in portfolios for three basic reasons: 1) It has produced solid returns over time, 2) it is uncorrelated to pretty much every other investment, which adds diversification to portfolios, and 3) it has performed particularly well when stocks have performed particularly poorly.
Unfortunately, recent performance for trend-following managed futures strategies has been quite poor. A recent paper by AlphaSimplex, a firm that runs these types of strategies, highlighted the recent poor performance, and in one chart they show that trend-following managed futures strategies are experiencing their worst drawdown ever.
One thing you’ll notice in the chart is that returns are somewhat cyclical, usually with strong returns followed by weak returns and weak returns followed by strong returns. When going through a rough patch in any investment, it is normal to wonder if it is worth it to still hold on or if you are better off selling and switching to an investment that has been performing better. In the AlphaSimplex paper, they highlight that after these drawdowns, that is usually when you experience some of the best returns.
Of course, we can never be certain that historical patterns will hold, but if the future has similarities to the past, and it almost always does, we should expect much stronger performance in these strategies going forward. Hence, we continue to remain invested and believe these strategies will continue to play a role in portfolios.
