By Philip van Doorn
A futures fund managed by Credit Suisse takes advantage of price volatility in stocks, bonds, currencies and commodities
Managed futures strategies can be useful for investors during periods of economic uncertainty.
The strategies seek to take advantage of price trends — up or down — and produce positive returns that offset declines elsewhere. Having some money committed to a managed futures strategy can lower the overall risk of a portfolio and potentially prevent an investor from making a rash move that they may later regret.
Yung-Shin Kung, chief investment officer for quantitative investment strategies at Credit Suisse Asset Management in New York, described a managed futures strategy that takes advantage of market rotations that cause “tradable trends.”
These price trends occur and can be taken advantage of because of “lead and lag effects” in how investors process information and make investment decisions, Kung said in an interview. He added that a managed futures strategy gives the average investor access to the kind of dynamic trading decisions that hedge funds use. Many institutional money managers have formal decision-making processes that can slow them down, he said.
The managed futures strategy is not intended to be linked to stock market performance. This year has been a year of big falls for stocks and bonds as the Federal Reserve has taken steps to suppress high inflation. It has also been a boon for Kung’s strategy.
Here’s a chart showing the year-to-date performance of the Credit Suisse Managed Futures Strategy Fund and the SPDR S&P 500 ETF Trust (SPY):
Here’s a look at four more managed futures strategies from May, including the Pimco Trend Managed Futures Fund.
Managed futures exposure can help calm investor fears
During periods of high volatility in the stock or bond markets, investors may find it difficult to stay grounded. Time and time again, cycles of market pullbacks and recoveries have shown that most investors have been better off waiting through the cycles and even continuing to pour money in, rather than trying to time the market by waiting on the sidelines. The tendency is to re-enter after a recovery has begun, hurting a portfolio’s long-term performance.
This chart, provided by John Buckingham, editor of The Prudent Speculator (published by Kovitz Investment Group of Chicago), illustrates how equity investors have hurt their long-term returns through market timing efforts through 2021:
Credit Suisse Managed Futures Strategy
Kung explained that Credit Suisse’s Managed Futures Strategy focuses on “capturing price trends, up or down,” in four broad asset classes: stocks, bonds, currencies and commodities.
This is done by placing futures on “large bell instruments” to take advantage of price trends, Kung said, adding: “We have no structural exposure to any market index.”
The management team looks at “16 distinct moving average windows” in 18 instruments linked to the four asset classes, Kung said. For example, if nearly all moving averages for energy commodities were showing rising prices, the fund would take a longer energy trade.
If there is a conflict between the moving averages, meaning falling prices for some time periods and rising prices for others, the fund will have lower exposure or even stay out of that asset class entirely.
The most recent price trends are compared to longer trends going back three to 18 months.
“If we see that the average price of the most recent several trading days is higher than it has been over a longer window, that will signal to us an uptrend,” and vice versa, Kung said.
Trades are generally first-month contracts, which are the most liquid.
“We seek to maintain a very clean reflection of trend following,” Kung said.
A managed futures strategy typically holds cash on the side. This means that a fund manager can invest that money outside of the futures strategy — for example in long stock positions.
This isn’t necessarily a bull market strategy — a managed futures fund may benefit during a rising or falling market, but it probably won’t keep pace with stocks during the kind of asset bubble it helped fuel. of the recent growth market.
But during a period of high inflation and price volatility, as investors overreact to monetary policy statements and other events, exposure to a pure managed futures strategy can help smooth the investor’s ride.
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Hear from Ray Dalio at MarketWatch’s Best New Ideas in Money Festival on September 21st and 22nd in New York. The hedge fund pioneer has strong views on where the economy is headed.
-Philip Van Doorn
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