Crisis Alpha

Terry Flanagan

When the macro proves to be disruptive, technical managers are one-up in the age-old battle with fundamentalists.

Governmental interference in 2011 held a large presence in the markets, much to the dismay of market participants. Quantitative easing, an immobile U.S. Congress, and the European debt crisis are a few examples.

In times of geo-political crises, as in the case above, managed futures have reigned supreme. The alternative strategy is characterized by low correlation to the other major four asset classes (interest rates, equities, currencies and commodities), ability to trade on the long and short side, and reactive investment philosophy. Managed futures were up nearly 2% as the rest of alternatives crashed in 2011, according to the Dow Jones Credit Suisse Hedge Fund Index.

While today managed futures are offered in a variety of vehicles—index replicators, alternative mutual funds, separate accounts, and limited partnerships, they are the “quintessential hedge fund”—originally designed to be lowly correlated, true diversifiers to one’s portfolio.

“Managed futures has become to be known as a provider of ‘crisis alpha’—a concept that they provide an excess rate of return during periods of crisis,” said Jon Sundt, president and chief executive officer at California-based Altegris Investments, a multi product buy-side and vendor firm, approximately $1.2 billion in assets. The Altegris 40 Fund is the main practitioner of the firm’s managed futures strategies, a “best of breed” fund of funds of 40 CTA programs.

Sundt, a former executive of Man Financial, began his career as an options market maker in 1986 and has since endured a plethora of market crises, such as the tech bubble, and most recently, the 2008 credit crisis.

For some portfolio theorists, typical diversifiers have long included REITS (real estate investment trusts) and commodities. Yet, in 2008, both of those assets lost half their value, precisely when investors relied on these alternatives to stay afloat.

For roughly the past two decades, managed futures had a -15.7% maximum drawdown while the Nasdaq Composite Index had one of -75% and the S&P 500 stock index had one of nearly -45%, gearing up investors for a smoother “investment ride.”

While managed futures employ managers with a heritage in trading, Dave Kavanagh, general partner at multi-billion, Chicago-based, Grant Park Fund, warned that investors need to stick with the strategy for the long-term, making it suitable for endowments and foundations, and other long-oriented institutions.

“I suggest you don’t trade managed futures per se, but rather stick with a long-term program to compliment your equities and fixed income exposure reap the benefits of low correlation,” he said. “You can’t time the trading of managed futures.”

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