Managed Futures: What Are They All About?
Most investors are familiar with the basic building blocks of a portfolio: equities, bonds, cash, and perhaps property or commodities. Managed futures sit in a less familiar part of the investment world. They are often grouped under ‘alternatives’, but that label can make them sound more mysterious than they need to be. At their core, managed futures are investment strategies that trade futures contracts across a wide range of global markets, including equity indices, government bonds, interest rates, currencies, commodities and sometimes other liquid financial instruments.
The phrase ‘managed futures’ does not describe one single strategy. It describes a broad category of professionally managed strategies that use futures markets as their main implementation tool. A futures contract is simply an agreement to buy or sell an asset, or receive/pay the change in value of an asset, at a future date. In practice, futures are widely used because they are liquid, standardised, relatively low-cost to trade, and allow investors to take both long and short positions. A managed futures strategy might therefore profit from rising equity markets, falling bond yields, a strengthening US dollar, a falling oil price, or a rising gold price, depending on how it is positioned.
The best-known managed futures approach is trend following. Trend-following strategies try to identify markets that have been moving persistently in one direction and then position in the same direction. If a market has been rising, the strategy may go long. If a market has been falling, it may go short. The basic intuition is simple: prices sometimes move in trends because information is incorporated gradually, investors underreact or overreact, risk premia vary over time, and large institutional flows can reinforce existing price moves. Trend following does not require the manager to forecast where inflation, interest rates or economic growth will be next year. Instead, it asks a simpler question: ‘Which markets are already moving, and is that movement strong enough to justify a position?’
However, managed futures should not be reduced entirely to trend following. Some managers use shorter-term signals, carry signals, relative value trades, volatility adjustments, macroeconomic inputs or discretionary judgement. Others are almost entirely systematic. Some focus on medium-term trends across dozens of futures markets; others trade more actively or combine several signals. What unites the category is not a single forecasting model, but the use of liquid futures markets to build diversified long and short exposure across asset classes.
One reason managed futures are interesting is that they are not structurally dependent on markets rising. A traditional equity fund generally needs equities to go up over time. A conventional bond fund benefits from income and, depending on duration, falling yields. Managed futures are different because they can be long or short. This means they can potentially make money in environments that are difficult for traditional portfolios. For example, if equity markets are falling, bond yields are rising, energy prices are rising and a currency is weakening, a managed futures strategy may be able to position for those moves rather than simply suffer from them.
This is why managed futures are often discussed in the context of diversification. A conventional balanced portfolio usually relies on equities for long-term growth and bonds for income, stability and ballast. That works well when equities and bonds diversify each other. It works less well when both fall together, as happened in 2022 when inflation rose sharply and interest rates moved higher. In that kind of environment, a strategy that can go short bonds, short equities, long commodities and long inflation-sensitive markets may behave very differently from a stock and bond portfolio.
The academic and practitioner literature generally finds that trend-following managed futures have historically had low correlation to traditional asset classes. Hurst, Ooi and Pedersen (2017), for example, study trend following across global markets over a very long history and find positive average returns with low correlation to traditional assets. Moskowitz, Ooi and Pedersen (2012) also document time-series momentum across equity index, currency, commodity and bond futures. The basic finding is not that every trend-following manager will outperform, or that managed futures are guaranteed to protect a portfolio in every crisis. Rather, the evidence suggests that price trends have appeared across many markets, asset classes and time periods, and that diversified strategies designed to capture them can produce return streams that look meaningfully different from traditional long-only assets.
The phrase ‘crisis alpha’ is often used here, but it needs careful handling. It refers to the idea that some strategies may generate positive returns during equity market crises. Managed futures have sometimes done this, particularly when crises involve sustained trends: falling equities, falling interest rates, rising safe-haven currencies or strong commodity moves. But crisis alpha is not guaranteed. If markets crash suddenly and then rapidly reverse, a trend-following strategy may be late to adjust. If there is no clear trend, or if markets whipsaw from one direction to another, managed futures can struggle. Their diversification benefit is therefore probabilistic, not contractual.
Managed futures are not portfolio insurance. Indeed, insurance has an explicit payoff structure: you pay a premium and receive compensation if a specified event happens. Instead, managed futures are an investment strategy; they may perform well in some equity bear markets, but they can also lose money during benign markets, choppy markets, or periods when trends are weak. Their value is better understood as a source of diversifying return, not as a guaranteed hedge.
The use of futures also leads to misunderstandings. Many investors hear ‘futures’ and immediately think of speculation or excessive leverage. That is understandable, but incomplete. Futures are tools. They can be used recklessly, but they can also be used prudently. A managed futures manager does not need to post the full notional value of every contract as cash. Instead, they post margin, with the remaining collateral often held in cash or short-term instruments. This makes futures capital-efficient, but it also means risk management is crucial. Sensible managed futures strategies usually target a level of portfolio volatility and size positions according to the risk of each market. A position in a volatile commodity future should not be treated the same as a position in a lower-volatility government bond future.
This is why risk control sits at the centre of managed futures. The manager must decide which markets to trade, how to measure trends, how quickly to react, how much risk to allocate to each position, how to manage correlations, how to deal with transaction costs, and how much overall volatility to target. Two strategies can both be described as managed futures, yet behave very differently because they use different lookback periods, different markets, different volatility targets, different rebalancing rules and different risk limits.
The return profile can also be uncomfortable. A traditional equity investor is used to being rewarded for bearing economic growth risk over long periods. A managed futures investor is accepting a different kind of discomfort: long periods of modest or disappointing returns, followed by occasional strong performance when trends become clear. Trend-following strategies can look especially frustrating after a period of sharp reversals. They often buy after prices have already risen and sell after prices have already fallen, which means they can appear late. But that is part of the design. They are not trying to pick turning points. They are trying to participate in sustained moves.
This also means recent performance should be interpreted carefully. After a strong period for managed futures, investors may be tempted to chase returns, especially if the strategy has just performed well during a difficult period for equities and bonds. After a poor period, they may be tempted to abandon it. Both reactions miss the point. The role of managed futures, if used at all, is usually strategic rather than tactical. The case for holding them rests on long-term diversification, not on whether last year’s return was impressive.
Fees and implementation matter a great deal. Historically, managed futures were often accessed through hedge funds or commodity trading advisors, with relatively high fees and limited accessibility for ordinary investors. More recently, liquid alternative funds and ETFs have made managed futures easier to access, although not necessarily simple. Lower-cost access is welcome, but investors still need to understand what the fund is actually doing. Some products may be highly trend-following oriented. Others may be broader macro or multi-signal strategies. Some may use a limited set of markets, whilst others may be more diversified. Some may target high volatility, whilst others may be more subdued.
For portfolio construction, the key question is not whether managed futures are ‘better’ than equities or bonds. They are not a replacement for long-term growth assets. Equities still have a clear economic rationale: shareholders participate in corporate profits and bear business risk. Bonds still have a role as contractual claims with income and, depending on the environment, defensive characteristics. Managed futures are different. They may be useful because they can behave differently from both. In a portfolio context, an asset or strategy can be valuable not only because of its standalone return, but because of how it interacts with the rest of the portfolio.
That said, investors should be realistic. Managed futures can be complex, tax treatment can vary by vehicle and jurisdiction, fees can be higher than traditional index funds, and the strategy may underperform for extended periods. It can also be psychologically difficult to hold because the underlying positions are not always intuitive. A fund might be short government bonds, long the US dollar, short copper, long Japanese equities and long wheat at the same time. For an investor used to simple long-only funds, that can feel opaque.
The strongest argument for managed futures is therefore not that they are clever or exotic. It is that they offer exposure to a different return pattern: diversified, rules-based or actively managed participation in trends across global futures markets, with the ability to go long and short. Their weakness is that this return pattern is inconsistent and can be hard to stick with. Their strength is that, when traditional assets are being driven by the same macroeconomic shock, managed futures may be positioned on the other side of that shock.
A sensible conclusion is that managed futures deserve neither blind enthusiasm nor automatic dismissal. They are not magic, and they are not suitable for many investors. But they are also not merely speculative trading dressed up as investment science. Used carefully, they can be a genuine diversifier within a broader portfolio. The investor’s task is to understand the role they are meant to play: not to predict the future perfectly, not to protect against every downturn, and not to replace equities or bonds, but to provide exposure to persistent trends across many markets in a way that traditional portfolios generally do not.
References
Hurst, Brian, Yao Hua Ooi, and Lasse Heje Pedersen. 2017. ‘A Century of Evidence on Trend-Following Investing’. Journal of Portfolio Management.
Hurst, Brian, Yao Hua Ooi, and Lasse Heje Pedersen. 2013. ‘Demystifying Managed Futures’. Journal of Investment Management.
Moskowitz, Tobias J., Yao Hua Ooi, and Lasse Heje Pedersen. 2012. ‘Time Series Momentum’. Journal of Financial Economics 104 (2): 228–250.