Unmanageable Futures
by HunterOver the last few days, the Return Stacked guys (Corey Hoffstein of Newfound Research and Adam Butler of ReSolve Asset Management) + several others have been providing some great context around the recent struggles of one of my personal favorite diversifying strategies, managed futures. And to be clear, the Return Stacked guys have a vested interest in educating and assuring investors - their stock + managed futures ETF $RSST has been taken a beating YTD with stocks and trend performing poorly.
But, as those familiar with managed futures (or trend strategies in general) might already know, these are not generally a “first responder” or “crisis alpha” style strategy - despite what some investment firms might claim in their marketing materials. And that has been true thus far through this particular drawdown too - the largest managed futures ETF, $DBMF, is down ~3.5% YTD. The graph below shows the performance of several managed futures/trend following ETF strategies YTD, courtesy of Koyfin. Not exactly the diversification you’re looking for with the S&P at -8%. Although to be fair some of the mutual fund counterparts to these strategies have faired noticeably better.
Source: Koyfin, data as of 04/15/25
The TLDR on what’s been happening (per the linked tweets in the paragraph above):
Whipsawing currencies, plunging metals (ex-Gold), and lagged sympathetic drawdowns in foreign equities have caught CTAs (and broader managed futures strategies) offsides and been driving poor performance for managed futures alongside domestic equities.
This is not out of the ordinary - managed futures tend to struggle in the early days of drawdowns. In the last 25 years (the life of the SG Trend Index, the commonly used benchmark for managed futures strategies) managed futures have only been positive once in 10 occurrences over the first 10% of the drawdown (average has been roughly -3%).
On the brighter side, managed futures often outperform after the initial -10% drawdown. Per Adam Butler managed futures aren’t “about avoiding all drawdowns. It's about having systematic rules that position you to capitalize on the extended trends that follow major market dislocations.”
Again, I highly recommend taking a look at the linked tweets above as I think they provide a lot of great rationale and insight around the current environment.
That being said, I thought it would be useful to visualize the current drawdown in managed futures (as measured by the SG Trend Index) vs. historical performance when the S&P has experienced a major drawdown (-10% or worse).
This first chart shows SG Trend performance over the first 30 days of an S&P drawdown (again -10% or worse). As you can see, the negative absolute performance is certainly not abnormal, but we are certainly on the lower end of the return spectrum thus far. Only the “Santa Crash” of 2018 was more disappointing, historically speaking. And the historical average has been relatively flat at this point in the drawdown.
Zooming out a bit to consider the first 90 days of the drawdown, we can see the more encouraging (and diversifying) return profile of managed futures. Historically speaking, this is more like what we are looking for but of course requires the patience for the strategy to shift and recognize the extended trends in markets.
In the back of my mind I do wonder if something is different this time around. My base case assumption since Trump’s election in the Fall has been that we are staring down the barrel of four years of political chaos. So far this administration has delivered on that. And I wonder if the elevated volatility and uncertainty might somehow alter the dynamics of strategies like trend following that depend on emergent and extended regimes in financial markets. But looking at the historical context here has given me some confidence that things don’t appear that abnormal. And as someone with exposure to these strategies myself, I can certainly sympathize with disappointed investors, at least in the short term. But I think it’s also important for allocators and investors alike to recognize that non-correlation is not the same as inverse correlation. And that managed futures is a diversifying strategy, not a hedging strategy. Certainly a space to keep an eye on as we move forward this year.
