Strong First Half for Managed Futures Hedge Funds but Investors Yet To Return Significantly

The managed futures corner of the hedge fund industry has had a good first half of the year. Through the end of May, the average return was +9.86% according to Nasdaq eVestment – and that’s even after giving back -0.58% in May (data for June was not available at the time of publishing).

The data shows something of a rebound from 2023, when the category delivered a minor pullback of -0.96%; managed futures strategies are heavy on trend-followers, which got caught with their trousers down in March last year when a sharp reversal in fixed-income markets following the collapse of Silicon Valley Bank exposed those with medium-term short positions in bonds. The space never really recovered after that.

But the story of the past five years for this part of the world is generally a good news story; in 2022, these products delivered +9.56% in returns; in 2021, +6.83%, and in 2020, +5.77%.

Whilst last year bucked the trend (pun intended), those numbers should, in theory, deliver an influx of allocations. And that did indeed happen – kind of. According to Nasdaq eVestment, investors added a net $12.98bn in 2021 and then a net $6.12bn in 2022 to managed futures strategies. But in 2023, there was a net zero allocation and now, so far in 2024, assets have left the space, with $2.05bn exiting.

Investors have a habit of buying managed futures at the top and selling at the bottom. Bad prior experiences could be a reason why they stayed on the sidelines last year, but the broader picture is still disappointing.

“2023 was disappointing for managed futures and despite a very good 2022, perhaps investors feel justified in terms of why they didn’t jump in,” said Tom Wrobel, Capital Consulting & Capital Introductions, Prime Services & Clearing at Societe Generale.

“But in general, CTA asset raising has been disappointing in the past few years. The space has grown a small amount but not what you would have expected given the returns,” he added.

It is often the case that when returns are good, new launches pick up – because managers want to piggyback on the macro tailwinds that are supporting the delivery of positive numbers. But launches in the CTA corner of hedge fund land aren’t nearly as common as equity hedge strategies, for example – law firm Seward & Kissel’s annual look at new hedge fund launches, published in April this year, showed that in 2023, almost three quarters of new launches were equity hedge strategies, despite the space haemorrhaging assets in the past few years (-$27.4bn in 2022, -$56.25bn in 2023 and -$22.10bn through May this year, according to Nasdaq eVestment).

Part of the reason for the lack of new launches is that the space is littered with trend following strategies, which have become more of a commoditised space in recent times; some of the larger, diversified trend following products now available do not charge a performance fee, indeed. That means that when a new strategy comes to market, it’s just as likely to be a non-trend, shorter term, and / or alternative markets-based offering, which then tend to be smaller due to capacity reasons.

But for those that do launch, and those still in the market, part of the asset raising challenge that CTAs have is in understanding the mindset of the investors that they are pitching for an allocation.

“It’s about trying to learn about hedge funds generally and their place in an investor portfolio. How are they viewed – are they considered to be ‘crisis alpha’, tail risk mitigators, or alpha generators? And then, are they achieving that goal?” said Wrobel.

“The space has to get investors to think longer term. There can be a certain amount of convexity to the return profile of managed futures products. There’s a big push, then a bad period when you’re flat but when you have these bursts of volatility, investors need and want their alts bucket to deliver,” he added.

How managed futures products fare in terms of asset raising in the second half of this year remains to be seen, of course. And that the space continues to be dominated by trend following is a blessing and a curse; the former because the strategy continues to gain more awareness and the ‘black box’ criticism of the approach is no longer much of an objection, and the latter because the non-trend programs get lumped into the same bucket.

But for those in the market, driving additional allocations to the space will be down to continuing to educate – combined with a healthy dose of optimism.

“One of the messages we have tried to push is that if you have a core risk asset, and you are looking to add diversifiers, historically trend following have provided it as a core portfolio allocation,” said Wrobel.

“But managed futures allocations always lag on flows, so we’re hopeful of a stronger second half this year.”