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Insights: Why Now is the Time to Consider Managed Futures
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Why Now is the Time to Consider Managed Futures

Buying low into this long-term performer during your annual rebalance may help diversify risk

Throughout 2016, investors witnessed powerful trends—and equally powerful reversals. This ultimately caused the managed futures category to experience a below average year

That’s why now is a great time to consider increasing your exposure, or making your first allocation, to managed futures.

If you’re seeking more upside potential while still protecting your portfolio’s downside, you know you need to buy low and sell high. An annual portfolio rebalance is a great opportunity for investors to diversify risk—and investors can now “buy low” into managed futures.  

As a true diversifier, this strategy historically delivers both lower risk and increased returns—because it takes a different kind of risk than stocks and bonds.

One way to rebalance this year

Reviewing the performance of stocks, bonds and managed futures through November 2016 reveals a pretty typical year for a properly diversified portfolio: one portion up, one down and one relatively flat.

As you can see, an investor could properly rebalance the risk of this diversified portfolio by making only modest changes. In early 2017, you could:

  1. Sell high: reduce exposure to stocks by 3% to potentially capture some of the gains
  2. Buy low: Increase exposure to both bonds and managed futures by 2% and 1% respectively to potentially take advantage of the underperformance of both bonds and managed futures

Small adjustments may drive dramatic long-term change

By sticking to a strict rebalancing routine, investors can realize better performance, lower volatility and lower drawdowns. But only if they rebalance risk by buying low and selling high once each year.

This simple discipline can potentially produce powerful results, no matter the size of the account:

With just two steps:

  • Diversify risk between stocks, bonds and managed futures
  • Rebalance once per year

In 2016, stocks were up, managed futures were down and bonds were flat. But in other years, like 2008, the roles were reversed. Market conditions influence which portions of an investor’s portfolio are performing—and these constantly are changing through the investment cycle.

In the face of constant change, sometimes it’s best to stick to your discipline.

Disclosures

Past performance is not indicative of future performance.

The 50/30/20 portfolio consists of 50% stocks, 30% bonds, and 20% managed futures. Stocks are represented by the S&P 500 Total Return Index, bonds by the Bloomberg Barclays U.S. Aggregate Bond Index, and managed futures by the SG Trend Index.

The 60/40 portfolio is comprised of 60% stocks and 40% bonds. 

Index performance on this page was sourced from third party sources deemed to be accurate, but is not guaranteed. All index performance is gross of fees and would be lower if presented net of fees except for the SG Trend Index, which is net of fees. Investors cannot invest directly in the indices referenced in this blog.

Definitions

True Diversification: Investment strategies that have historically provided investors with at least 70% of the return of traditional 60/40 stocks and bonds portfolios while having less than .30 bear correlation to traditional 60/40 stocks and bonds portfolios.

(Managed Futures) SG Trend Index: A leading benchmark for tracking the performance of a pool of the largest managed futures trend following based hedge fund managers that are open to new investment. The SG Trend Index is equal-weighted and reconstituted annually. The SG Trend Index is formerly known as the Newedge Trend Index.

(Bonds) Bloomberg Barclays U.S. Aggregate Bond Index: Is an unmanaged index composed of securities from the Barclays Government/Corporate Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.

(Stocks) S&P 500: A stock market index based on the market capitalization of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor's. In this presentation, the S&P 500 is presented as a total return index, which reflects the effects of dividend reinvestment.

 

 

Disclosures

Longboard Asset Management, LP (LAM) is registered as an investment advisor with the Securities and Exchange Commission (SEC) and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the advisor has attained a particular level of skill or ability. LAM is also registered with the National Futures Association.

This website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications and links. The information on this site does not involve the rendering of personalized investment advice. You should consult a professional advisor before using any of the information, pursuing any of the investment ideas or implementing any of the strategies presented. We believe the information we present is factual and up-to-date, but we do not guarantee its accuracy and you should not should not regard it as a complete and exhaustive analysis of the subjects we discuss. Our opinions reflect our judgment as of the date of publication and are subject to change.

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The content of this website is provided for informational purposes only, and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Longboard Asset Management, LP does not provide legal, tax, accounting, actuarial or pension consulting advice or services.

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Definitions

Alternative investments: strategies that produce returns by taking risk other than equity and bond risk.

Bond: A debt security that shows ownership in a corporation or represents a claim in the corporation assets and earnings.

Correlation: a statistical measure of how two securities move in relation to each other.

Long: Buying an asset such as a stock, commodity or currency, with the expectation that the asset will rise in value.

Short: Buying an asset such as a stock, commodity or currency, with the expectation that the asset will decrease in value.

Stock: A security that shows ownership in a corporation or represents a claim in the corporation assets and earnings.

True diversifiers: investment strategies that have historically provided investors with at least 70% of the return of the traditional 60/40 stocks and bonds portfolios while having less than .30 bear correlation to traditional 60/40 stocks and bonds portfolios.