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.
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.
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:
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%.
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.
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.