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The Best Investment Alternative In A Down Market
The demand for alternative investments has grown to the point at which we might have to leave the phrase ‘alternative investments’ in the buzz-phrase bin. We believe that in 2016, there is a tremendous opportunity to separate from generic phrases such as ‘alternative investments’ and ‘hedge funds’, and begin increasing wealth by understanding and investing in specific, promising and proven areas, such as managed futures.
As an asset class, managed futures programs tend to be uncorrelated with stocks and bonds. In this environment, investors need more ways to decrease the correlation and tail risks in their portfolios. Managed futures offer low correlation with traditional markets while reducing volatility through a diversified portfolio. This is especially important during the bad times for traditional investments.
Looking forward to 2016, we see several global macro drivers that could lead managed futures to perform well. These include: a higher interest rate environment, an overvalued stock market, an overvalued US dollar, and volatility in energy prices due to geopolitical factors. And these are only the factors that we can identify now that all point to the advantages of adding a managed futures strategy to the mix.
Managed futures has history on its side. Remember that quaint old phrase “dot com bubble”, or the recession in the early 2000s following the bursting of that bubble? How about the financial crisis of 2008? Forward-thinking investors in these periods recognized a critical need to find diversification that was far wider than stocks and bonds. In the years since the post-financial crisis, it has been hard for investors not to become complacent as liquidity has been pumped into the economy and the stock markets continued to climb. But this time, more investors are demanding tools and products that reduce correlation and tail risks.
In fact, since its inception 30 years ago, managed futures’ growth in assets has been exceptional. Today, many leading public pension funds now include managed futures in their portfolio, including South Carolina Retirement, Texas Employees and Illinois Teachers.
Managing their portfolios in a nimble and responsive manner is one reason why managed futures offers the “true alpha” of alternative investments. The art of limiting sector risk, determining position sizing, and knowing when to cut losses are key to outperforming industry benchmarks. Managed futures portfolios can take long and short positions across 150 different global futures markets. Some investors have turned to “long only” commodities indices and products. However, such products only exploit one side of the market - one reason they have performed poorly. The bilateral, active quality of managed futures, in contrast, arms this asset class with the potential for positive performance in bear equity and commodities markets, but also provide tactical commodity exposure, while offering tremendous liquidity and transparency.
As we head into 2016, we believe that managed futures are no longer an alternative investment to consider. They are a standby that is required for diversification in times of uncertainty.
Jon is CEO of Kettera Strategies, the operator of Hydra — a platform registered with the U.S. Commodity Futures Trading Commission — that allows qualified investors access to easily invest in a carefully curated array of CTA, FX, and Macro strategies.