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Opalesque Futures Intelligence

Futures Lab: Comparing returns for long holding periods reveals an interesting difference

Tuesday, September 29, 2009

Consistent Returns

Look at CTAs’ monthly returns for 2009 and you notice some big ups and downs. But take five-year averages and you find that managed futures returns are a lot less volatile than stocks.

This fascinating piece of analysis comes from Steben & Company. We thank Michael Bulley, senior vice president for research and risk management at Steben, as well as Ken Steben—see Founding Father.

Managed futures has been in the limelight due to last year’s stellar returns. However, the benefit of managed futures in an investor’s portfolio can not really be measured by its short-term potential. Rather, it is long-term historical performance that should be considered to understand the effect of investing with commodity trading advisors.

. Measured over longer holding periods – such as five years – the average returns of managed futures investments are less volatile that traditional investments. As the data shows, a managed futures index has more consistent returns than the stock market. Moreover, CTA performance is not correlated with other asset classes.


W compare returns from the S&P 500 index and managed futures as measured by the CISDM CTA Equal Weighted Index. In order to be included in this index universe, a trading advisor must have at least $500,000 under management and at least a 12-month track record. Let’s begin by looking at five-year holding periods from January 1990 through May 2009.

Stock Market vs. Managed Futures
Five-year periods, January 1990-May 2009

S&P 500 CISDM CTA Index
Avg. Compounded Return 12.58% 11.06%
Maximum 29.26% 19.85%
Minimum -6.64% - 0.24%

The S&P 500 has a slightly higher average compounded return for these intervals (table). However, the range of returns was significantly wider for the S&P 500 than for CTAs. This means that there was more risk to stocks than managed futures for the same holding intervals during this time.

To get a better idea of the historical impact of long holding periods, we calculated the distribution of five-year rolling period returns from Jan 1980 through May 2009. Figure 1 demonstrates the tighter clustering, i.e., greater consistency, of managed futures returns compared to the stock market.

Another consideration is that investments with less correlation make better portfolio diversifiers. Although the correlation coefficients of some alternative strategies have increased over time, the correlation between managed futures and common market indices remains low.

We conclude that if the objective is to diversify a portfolio over longer investment horizons, managed futures is a superior choice. For the longer holding periods, managed futures have historically shown highly stable return characteristics and compared to equities pose lower risk for similar return.

This article was published in Opalesque Futures Intelligence.
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