Managed futures are easily the most volatile of the Liquid Alternatives sectors. Over the past five years the average annualized standard deviation in the sector has been 8.2%. This is a figure that does not compare favorably with even the raciest parts of the fixed income market. US High Yield, for instance, has an annualized standard deviation of just 4.8%.
However, when viewed side-by-side with the most active part of most of these portfolios – namely, commodities – it starts to make a little more sense. Commodities typically take up around a third or more of the risk budget in these products, and the annualized volatility in long-only Natural Resources funds over the same period is 19%.
When you throw in the fact that the second largest allocation is typically in the equity futures market, then the volatility that investors are exposed to seems justified.
Good times, bad times
Following a brief respite, resources stocks are currently enduring another torrid run. That has hit the returns of managed futures funds, with the average manager delivering -5.3% over the past 12 months. Not everyone has been hit to that degree though, and the Longboard Managed Futures Strategy has limited its losses to just -2%.
The $442 million portfolio, managed by the group’s founders, Cole Wilcox and Eric Crittenden, has recently reached its five-year anniversary. Over that period its returns of 24% put it second in the sector, only just behind the Ironclad Managed Risk fund’s 24.2% return.
The portfolio has a fairly modest 75 positions and broadly equal weights in commodities (34.5%) and equities (33.6%). Wilcox and Crittenden have decided to go almost entirely long in the latter, which has been a major boost to their short-term returns.
They currently have 24 long positions in equity markets, versus a solitary short. These include long positions in the booming Nasdaq 100 (2.7%) and MSCI Emerging Markets index (1.6%), in addition to individual country bets in Asia Pacific, including the Hang Seng (1.7%), Taiwan (2.4%) and India’s Nifty Fifty index (1.6%). These stakes have helped the fund to an 8.2% gain year-to-date, moving it to the top of the leaderboard over three years.
Despite these positions in mostly buoyant equity markets, the fund hasn’t entirely compensated for the difficult time in commodities – an area where the managers’ long/short balance is more evident, at 15 long to 13 short. Their positions in gasoline, soybean oil, silver and brent crude all appear in the top five biggest detractors of the year to date.
In second place over three years is the $540 million Altergris Futures Evolution Strategy fund, in which the 12% fixed income portion is run by star manager Jeffrey Gundlach. The portfolio has a more typical 230 positions, with 38% allocated to equities, 25% in commodities and 25% in currencies. The past 12 months have not been such a good run for the fund with losses of 9.1%. However, most of that came at the back end of 2016, with losses for the year to the end of July at a much more palatable 1.8%. This has taken the sheen off what has been a market leader in terms of returns for quite some time.
Even with an isolated success story in the shape of Longboard, any losses over the past year have been hard to stomach for most investors, and accordingly they have pulled $1.6 billion from funds in the sector over that timeframe.