April 30, 2012

Managed Futures – Smaller managed futures funds able to exploit niche commodity markets and the most volatile conditions are increasingly likely to win assets from investors disappointed with returns from the big trend-followers that dominate the industry.

Managed futures, or commodity trading advisers (CTAs), attracted a wave of assets in 2009 after performing well during the 2008 financial crisis.

Mainstream institutional money flooded into some of the best-known trend-followers, so that 60 percent of total CTA assets are now with the top 10 players.

But since 2009, industry performance has been patchy as traditional trend-following models have struggled in range-bound markets in which it is hard to gain traction.

Studies have also shown that as funds grow and attract assets from more conservative pension schemes and insurance companies, performance erodes.

Managers become more risk averse and too big to effectively exploit opportunities in smaller futures markets because of the limited liquidity there.

“Large or small shouldn’t define the strategy out-turn but in reality it does,” said John Godden, chief executive of IGS, an adviser in the alternative investment space.

He argues that an investor using just the big trend-followers will experience a high degree of correlation in their managed futures portfolio: “They are using a lot of the same tools at the same time in the same way on the same markets.”

Godden said investors need to look in different corners for real decorrelation: “Getting actual commodity plays into place is something people need to be doing.

There is a feeling that they have been slightly misled in terms of what part commodities are playing in these funds.”

Despite the CTA label, many of the biggest funds generate most of their returns from currencies, interest rates and equities futures.

Their size prevents them from generating meaningful returns from smaller, niche commodity markets such as cocoa and sugar, where they risk moving the market against them.

“Often the smaller managers can spend more risk budget in some of the smaller commodities markets,” said Matthew Roberts, a senior investment consultant at Towers Watson.

Jan Auspurg, managing director of AQ Advisors, said that smaller funds, like his Aquila Capital Spectrum Fund, which has some 180 million euros under management, are better able to exploit commodity market signals.

- Reuters.