Managed Futures Has Difficult First Half But Optimism Abounds for H2
Data from Nasdaq eVestment suggests that the managed futures hedge fund category has enjoyed a solid spell recently; four consecutive years of greater than 5% returns from 2019-2022 has provided a welcome boost to this corner of hedge fund land after delivering a largely hit-and-miss eight years prior to that.
Investors were taking note; Nasdaq eVestment data also shows that the managed futures category added $12.98bn in additional investor capital in 2021, followed by $6.12bn in 2022.
But now they’re pulling money out again. In May, $1.34bn left the space, bringing year to date inflows through May down to $2.04bn, after they pulled $2.36bn in April.
Performance woes in the first half of the year is a likely driver of these redemptions. Nasdaq eVestment’s Managed Futures Hedge Fund Index is up only +0.18% through June.
Trend-following strategies comprise the bulk of the assets in the managed futures space – but not all, something that’s a common misconception, much to the chagrin of the non-trend funds and programs in the space – and thus, their efforts have an outsized impact on the category overall.
This year, a specific event was the driver of performance woes for trend-followers; the reversal in fixed-income markets during March following the collapse of Silicon Valley Bank (‘SVB’). The impact was most acute at the short-end of the US curve, with some 3-month interest-rate futures experiencing six-standard deviation moves of over 100 basis points in a single day.
“For medium-term trend-followers, a market reversal of this size & speed is always likely to be problematic, particularly given the preceding price-action, even for those CTAs with faster reaction speeds. With short-end US yields extending to new highs early in the month, many CTAs were likely inopportunely drawn into increasing their short-exposure just before markets re-priced dramatically. Leading up to that point, the price-action in US fixed-income had been ideal for trend-following, as markets enjoyed a persistent, low-volatility downtrend,” said David Gorton, Chief Investment Officer at London-based investment firm DG Partners, which manages a diversified trend-following strategy. “The market reversal was consequently all the more aggressive as the US growth outlook and policy trajectory suffered a stark reappraisal. Whilst it may be a timely reminder that trend-following strategies can experience abrupt drawdowns, it also demonstrates their ability to swiftly recover losses, which have been recouped during Q2 as risk has rotated toward new trends elsewhere, particularly in Japanese equity markets. Furthermore, unlike their human counterparts, these shifts to new trends by the algorithms occur without emotion or reluctance, despite the difficulties faced earlier in the year.”
Indeed, in March, Nasdaq eVestment’s managed futures index was down -3.62%, its worst month of 2023 to date.
Correlation isn’t causation, of course, but given the outflows in April and May, one might be forgiven for thinking that some investors were getting cold feet.
But managed futures types say that investors have a habit of pulling money from the space at the wrong time, which has the added impact of making them once bitten, twice shy when they look at these funds down the road. And these observers can point to data to back up their claims - in 2008, managed futures enjoyed an stellar +10.98% return as long bonds trades in the aftermath of the global financial crisis-driven equity market rout delivered strong gains, and a modest gain of +1.85% in 2009 followed by +9.15% in 2010; cue $11bn of inflows in 2011, when managed futures gave back -3.96%.
However, there is a sign that investors could be changing their behaviour. $1.39bn was added to managed futures programs by investors in June, and managed futures programs have recovered their losses from early spring. But performance isn’t the only thing on investors’ minds at present, according to Gorton.
“Many investors are still very cognisant of how undiversified they were in 2022 when bond & equity markets substantially sold-off at the same time. Interest consequently remains high in what is still an uncertain market regime,” he said.
Still, performance is a the biggest piece of the pie. And those investors that have either come back into the space, or added to existing exposure, may have bought at just the right time.
“A difficult Q1 for CTAs performance-wise (largely due to a sharp reversal in fixed-income markets during March) likely played a part in keeping new investor interest on the side-lines, whilst higher returns on cash have also raised the bar, in contrast to the post-GFC period,” said Gorton. “However, year-to-date CTA losses have now been largely recouped, and so with confirmation of a clear turnaround in performance we would hope & expect in-flows to pick-up again.”
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