PIMCO Considers Managed Futures vs. Multi-Strategy Funds

Managed futures and multi-strategy funds have both become increasingly popular over the past several years. Both provide investors with the potential to diversify their returns, and to outperform during equity-market downturns – but which is better? That’s the question considered by PIMCO’s Justin Blesy, Ashish Tiwari, and Chris Santore in their July 2016 white paper Managed Futures and Multi-Strategy Funds: The Search for Diversification.

Equity Beta

Most managed futures and multi-strategy managers had low three-year trailing equity betas for the period ending May 31, 2016. But if low correlation to the stock market were an investor’s chief concern, managed futures were the better option: Over 40% of managed-futures managers had equity betas of less than zero, while just a tiny fraction of multi-strategy managers had that same distinction.

Distribution of 3-year trailing equity beta

Performance During Downturns

Moreover, authors Blesy, Tiwari, and Santore point out that, since most managed-futures and multi-strategy investors hold their investments in the context of a broad portfolio, their betas matter most during equity-market downturns. As is evident from the graph below, managed-futures and multi-strategy funds with higher equity betas had the worst performance during the recent 10% selloffs in the S&P 500, August-September 2015 and January-February 2016:

Average equity beta versus performance in market downturns

Dispersion of Returns

But not all managed-futures (or multi-strategy) managers are created equal: For the three-year period ending May 31, the gulf between the returns of managed-futures managers in the top 20% of the category and managers in the bottom 20% was 6.7%. By comparison, the gulf between the top and bottom quintiles of the multi-strategy category was just 3.7%.

Returns vary widely

Thus, it’s evident that manager selection – and the due-diligence process inherent therein – is even more important when choosing a managed-futures fund than when selecting a multi-strategy fund.

Dispersion During Downturns

Returning to those recent equity-market selloffs, August-September 2015 and January-February 2016, Blesy, et al. find that funds in both categories fared better in the latter downturn, which was longer-lasting (28 days versus 10). This is explained by the authors as a case of “whipsawing” in the earlier downturn, wherein managers lost on short bets.

Performance during recent market drawdowns

Conclusion

Blesy, Tiwari, and Santore conclude their paper by contrasting the ends and means of managed-futures and multi-strategy approaches: While their objectives may be the same, their paths to getting there are not. This necessitates a “closer evaluation of the considerations identified” in the white paper for investors interested in either managed futures or multi-strategy investing.

Ultimately, manager selection is key. In the authors’ closing words: “Overall, pairing a small number of these complementary managers may smooth the journey and increase the chance of realizing desired outcomes.”

For more information, download a pdf copy of the white paper.

Past performance does not necessarily predict future results.
Jason Seagraves contributed to this article.