I was recently interviewed by a reporter in Europe whose focus on investing reflected the ideas of most people I meet. He wanted to know what the next hot investment was going to be and how he should get into it before everyone else does. But instead of phrasing the question in that way he queried: “So where is the music going to play next?”
My answer was the same one I’ve given for the past 11 years. Those of us in managed futures are not clairvoyants, and we don’t have to be, because with managed futures funds, the music plays everywhere.
Managed futures not only play everywhere; they play in all types of market conditions.
What makes managed futures funds different from every other asset class is their broad diversity, low correlation to other asset classes, and that managed futures sophisticated trading systems trade on trends, or human behaviours, that have been in existence from the beginning of time – all without being influenced by the human emotions of fear and greed, but instead acting on information that has been tested over time.
So where does the music play? In managed futures, it plays everywhere.
It plays in over 100 futures markets on exchanges around the world. It includes commodities such as gold, crude oil and wheat as well as financial futures on currencies, interest rates and equity indexes to name a few.
And the results speak for themselves.
Managed futures have outperformed stocks and bonds over the past 30 years. Of course it’s easy to talk about positive returns when the markets are doing well, but what about when the markets are down, and events around the world make investors nervous?
Managed futures not only play everywhere; they play, or produce, in all types of market conditions. If you look at the worst 10 months for traditional portfolios of stocks over the past 20 years, when those portfolios had negative returns, you would find that managed futures funds had positive returns in nine out of those 10 months. And in crisis scenarios like September 2001 or the economic crisis in Russia, managed futures funds achieved positive returns, while more traditional investments plummeted.
To be fair, however, there are times in good market conditions, like now, when managed futures trend followers sometimes don’t keep pace with the equity markets, especially in trend-less phases. My response is that in the long-term this is not a problem.
Investors in managed futures funds are educated over and over again that it’s the long-term investment strategy that is in their best interests. And it’s hard to argue with the fact that a US$1000 investment in a managed futures fund 30 years ago, would be worth approximately US$300,000 today. On average, that’s an annual performance of 20%, which is what the best managed futures funds produce. Unfortunately, many of today’s investors, investment advisors and banks are only looking at short-term performance. They are only investing in what worked over the last one or two years, and I think this is usually a bad strategy.
So when an investor, or even a friend, asks me where the music is going to play next, I respond that I am not a mind reader. But with managed futures, there is no other asset class with such high long-term yields and relatively small slumps; no other asset class that profits from both upward and downward trends; no asset class that trades in so many markets around the world; and no other asset class that trades entirely without the human emotions of fear and greed. Managed futures? It’s always where the music plays.
Christian Baha is a co-founder of the Superfund Group of investment companies.
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