Managed Futures Hedge Funds To Deliver Best Year Since 2008?

As a former commodities trader, I can’t help but keep an eye out for how the managed futures cohort of the hedge fund industry is doing. They had a rough time of it in the post-GFC ZIRP decade, but recent years have been much kinder thanks to higher rates and a more volatile macroeconomic environment.

Despite the Barclay CTA Index being down slightly last month at -1.08%, year to date gains stand at +5.2% – which, if these guys keep it up, will make this year the space’s best since the heady days of 2008 when the long bond trade delivered the ‘crisis alpha’ benefit that these products can provide.

Managed futures strategies – heavily dominated, at least, in terms of AUM, by trend-followers (but not exclusively, of course) need movement and they need trends. Most importantly, they need dispersion between asset classes and enough uncertainty to create sustained directional opportunities.

Oil provides an obvious topical example. The war between the United States and Iran, coupled with the problems shipping energy through the Strait of Hormuz, has injected another layer of uncertainty into energy markets this year. While modern CTAs are far more diversified across non-commodity markets (such as financial futures), episodes such as these are a reminder that commodities still have an important role to play in generating returns.

Another factor working in the industry’s favour that is – has been? – more medium term has been the end of the ZIRP environment that characterised much of the 2010s. For years, central banks suppressed volatility by signalling policy intentions well in advance, leaving markets with relatively little to disagree about. Bond yields drifted lower, equity markets generally marched upwards, and many of the trends that did emerge were either short-lived or crowded.

Today, markets are constantly reassessing the outlook for growth, inflation and monetary policy, often producing sharp moves across rates, currencies and equity indices. For trend-followers, that creates a far richer opportunity set than existed during the ZIRP era. You do not have to get every market call correct to make money; you simply need enough sustained trends across enough markets.

Of course, the sector’s recent comparative success (not just this year, but in the past few) should not mask the fact that managed futures are not designed to win every year. Their value lies in diversification and in their potential to perform when more traditional assets struggle: A bad month is almost the point with trend-followers – they’re designed to capture the big moves, not every move.

That was the lesson investors learned in 2008. While nobody is suggesting that today’s environment is comparable to the global financial crisis, the fact that the industry is currently on course for its strongest year since then says something important about the market regime we now find ourselves in.

The era of suppressed volatility and one-way monetary policy appears to be behind us. Some investors (and consumers) may not always enjoy the consequences, but for managed futures managers, it has been a welcome change of scenery.

Investors now operate in a market environment dominated by geopolitics, supply chain disruptions, fiscal policy, tariff disputes and questions about the long-term trajectory of inflation. Whether you agree with the various macro narratives is another conversation – what matters to managed futures hedge funds is that markets are moving again, and if the second half of this year is anything like the first, I wouldn’t be surprised if the CTA folks end up delivering double digit gains.

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Anthony D. Mascia is Managing Partner at EFSI. Send him an email here.

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