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Longer-term versus short-term managed futures performance

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A key driver for holding managed futures is crisis beta, the low or negative correlation during times "bad times" versus traditional assets. The crisis beta is a direct result of the divergent strategy of long/short trend-following. If there is a market dislocation, the trend-following may short the assets that are doing poorly and increase long exposure to those assets that are doing well. This will dominate long-only investing that is not fully diversified. 

Unfortunately, there are few guarantees of when trendS will occur and there is the potential for momentum crashes when trends reverse. Simply put, trend following will do well during bad times but there is a cost during normal times or period of trend reversals. You have to pay price for the benefit of trend-following. 

One way of reducing the risk from trend-following is to diversify the strategies employed within managed futures. Instead of only using trend following, diversification can be achieved through investing in short-term strategies. These strategies will provide diversification versus traditional assets but will also be less correlated with longer-term trend managers. Short-term strategies could still be focused on trends but the shorter time-frame makes it less correlated to the strategies that are looking for longer-term trends. 

Time horizon matters as a diversification tool.  

March is a perfect example of the difference in time horizon. The SG managed futures index declined by over 3 percent while the short-term traders index declined just over 1 percent. The short term index performed better in the first quarter albeit it did worse in 2015 and lagged when the large trends in the first two months appeared.

 A comparison between the two strategies since the beginning of 2015 shows that both happened to end up at the same spot, but the short-term index did it with less volatility. This is the power of looking to exploit shorter-term trends or counter-trends.  A mix of time diversification can go a long way to smoothing returns. 

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