In 2008 when traditional equity funds showed their worst returns in recent memory trend followers reigned supreme. The leveraged version of one high profile ‘black-box’ trend following Commodity Trading Advisor managed over 50% in 2008 while a more volatile member of this asset class managed a mere 21% gain for the year.
Since then there has been some faltering although if you had held on through the last 6 years you could be looking at rather handsome profits.
CTA funds, on a standalone basis, can disappoint but there is strong evidence of non-correlation to equities and many advocate them as a portfolio diversification tool, particularly if your outlook is to reduce overall volatility and improve predictability.
They typically display positive skew – that is, the upside capture when a CTA program captures a trend significantly outweighs the small losses while waiting for a trend to follow. The last few years have been a waiting game but I am fairly confident we are turning that corner.
It’s really a contradiction in terms to say there are Managed Futures/CTA/Trend Followers that have low volatility but some are certainly more volatile than others. If you can handle large drawdowns and hold on then evidence would appear to show that investing in the higher vol funds is worth it in the long run.
Taking the previous two examples over the period from 2009 to date as an example, the lower vol fund would have you just about break even whereas the more volatile version is double-digit to the positive.
Some would say that these funds are an essential diversification tool in an overall portfolio and do actually reduce volatility and my research would support this and even might go so far as to say that you could allocated less to a high vol fund than you might to a lower vol fund and achieve the same overall result.
So let’s take a look at one in particular, the IQS Futures Fund. The manager of this fund was for a while mixed in with similar managers in a ‘fund of funds” but broke away a few years ago and is now the sole manager.
The IQS Futures Fund was launched in November 2011 to offer investors the opportunity to achieve a high rate of return while keeping the level at risk within acceptable limits.
The assets of the Fund are traded by IQS Capital Management Limited utilizing the IQS Diversified Program. The Program trades a diversified portfolio of outright futures contracts, including interest rates, currencies, energy and both hard and soft commodities, using an objective approach, which employs a series of computer programs.
From its inception in October 1995 to date, the IQS Diversified Program has achieved returns comparable with those of the best performing traders in the managed futures sector.
I switched my own holding from the previous fund of funds to the IQS Futures Fund in November 2011 along with all my personal clients, bar one. If you had done the same, you would now (to end September 2014) be up some 130% than if you had remained in the former fund, which has fallen some 70% over the same period.
It’s not for the faint-hearted nor Widows & Orphans but as a long-term, forget about it play, you could do a lot worse.