The graphic below illustrates the principal of diversification by presenting the performance of managed futures against a portfolio of stocks and bonds during periods of stock market declines. The non-correlation often exhibited by Managed Futures against traditional investments such as stocks and bonds is particularly striking during periods of crises.
Managed futures: CASAM CISDM CTA Equal Weighted; Stocks: MSCI World; Bonds: JP Morgan Government Bond Global; Time scale: 01/1987 – 02/2008 Source: Managed Futures: Portfolio Diversification Opportunities
A key measure of track record quality and strategy ‘riskiness’ in the managed futures industry is drawdown. Drawdowns, or the percent retrenchment from an equity peak to an equity valley, are an inevitable part of any investment. A drawdown is in effect from the time an equity retrenchment begins until a new equity high is reached, i.e. in terms of time, a drawdown encompasses both the period from equity peak to equity valley (length) and the time from the equity valley to a new equity high (recovery). The chart below looks at the worst historic drawdowns for each of the indices from 11/1990 through 02/2008.
Managed futures: CASAM CISDM CTA Equal Weighted; Time scale:11/1990 – 02/2008; Source: Bloomberg
Because commodity trading advisors may establish positions on either the long or the short side of a market, managed futures investments have historically limited their drawdowns more effectively than many other investments. In the futures market, selling short in anticipation of a drop in price can be accomplished without additional restrictions or special margin requirements. We believe that it is potentially advantageous for investors to own investments that can appreciate during a period of generally declining prices, financial disruption or economic instability. As the above chart shows, drawdowns for managed futures have been less steep than those for major global equity indices.
Trading futures and options involves substantial risk of loss no matter who is managing your money and is not suitable for all investors. Past performance is not indicative of future results.