nisiprius wrote:So what is it all supposed to be about? Sophistication for the sake of sophistication?
First of all, when 75/25 US/ex-US stocks have a Sharpe ratio of 0.81 and bonds have a Sharpe ratio of 0.96, it generally ain't gonna look good if you replace either of those with any kind of alts. That is, ex-post we know that reducing exposure to really great investments (over the period) is not a good thing. That's more of the difference you're seeing than anything particular to managed futures itself.
If you leveraged your portfolio in order to add other things without reducing your stock/bond exposures then your conclusion might be a little different. You can kind of simulate this to a limited degree by just deleveraging the non-managed futures reference allocation with cash, and taking managed futures for the comparison out of the cash allocation. Now, with actual leverage you'd be borrowing at above the cash rate (roughly let's say 50 bp or so above 3-month T-bills at large institutional levels, which is effectively available to individuals via futures), so no, this comparison is not entirely fair. But I think it is illustrative:
Portfolio 1: 36% US stock, 12% ex-US stock, 32% bonds, 20% cash
Portfolio 2: 36% US stock, 12% ex-US stock, 32% bonds, 10% managed futures, 10% cash.
https://www.portfoliovisualizer.com/bac ... tion5_2=10
Managed futures is an investment strategy category primarily focused on trend following, based on the very simple concept of "the trend is your friend" (it's a bit ironic to call it "sophisticated"). That is, time-series momentum. Generally, this means investing long in whatever has been going up lately and shorting whatever has been going down lately, hoping that it'll keep doing the same thing. Usually, as implied by the name, this is implemented via futures contracts, which allow you to cheaply go long and short the underlying investments, be they individual commodities, equity indexes, bonds (well, Treasury bonds), currencies, etc. Futures also allow for leverage, obviously. Most implementations should be net over a business cycle around zero betas on average.
Managed futures is an old strategy, with decades of history from live money trading, so old there's a well-known index that tracks managers in the category, the BTOP50
, with an inception of 1987. Commodities trading advisors (CTAs) get lumped in with managed futures because they're both doing the same thing, though CTAs at least traditionally more explicitly via commodities futures as opposed to other futures.
Nowadays hundreds of billions of dollars are invested in these strategies and I think it's reasonable to expect that they're kind of competing for and crowding out the same alpha. You can find more details in a number of papers, including a couple by AQR themselves, which are obviously bullish on them:
https://www.aqr.com/~/media/files/paper ... utures.pdf
https://www.aqr.com/~/media/files/paper ... esting.pdf
That said, one of the objections to the work is that a significant amount of the backtested and historical return seems to come from the rebalancing assumed in the above. And as always, today's markets are not the same as yesterday's. Still, those numbers are kind of eye popping.
One of the potential benefits sometimes touted with managed futures is that the strategy inherently switches to shorting risk assets during a bear market where they've been declining, so in a protracted bear market where presumably you're overall getting hammered, this is something of a hedge, perhaps being negatively correlated to stocks (because it's actively shorting stocks). Yes, I made a mythical negative-correlation-at-least-at-times-with-stocks-for-a-strategy-historically-with-positive-returns argument, and I'm sure your alarm bells are ringing.
Of course if what you see is a bunch of zigzagging in underlying assets with no clear trends, managed futures will dutifully churn its wheels losing money.