MFUT and other managed futures ETFs

“Managed futures is among the most time-tested of alternative investing styles. Despite origins in commodities futures trading, a heritage made evident by the commodity trading advisor (CTA) moniker that remains in vogue today, the contemporary multi-asset approach to managed futures bears industry roots and institutional adoption spanning back to the 1970s. Attempts to bring managed futures products to the masses have witnessed a fair share of false starts over the years. During the late 1990s and early 2000s for example, a spate of private fund launches marketed to individual investors earned more of a reputation for high fees and lack of transparency than for diversification potential, sometimes charging investors as much as 9% per annum with few disclosures.

Managed futures is one of the largest alternative investment categories in the institutional space while public funds remain only a small and more recent portion of the space.

Early adoption of managed futures funds was aided by the tailwind of a challenging macro environment for traditional asset allocations. the average 12-month rolling return of the S&P 500 from 2000–2010 was -0.90% versus +7.98% for the SG CTA Index, a common hedge fund benchmark that tracks the 20 largest institutional managed futures funds. With a timely launch in 2007, the first U.S. ’40 Act managed futures fund returned +8.53% in 2008 versus -37.29% for the S&P 500, helping to springboard the nascent Systematic Trend category to a rapidly growing group that hit a peak of nearly $30 billion in assets across 55 funds by 2016.

Tailwinds turned to headwinds for managed futures funds by 2017 as investor enthusiasm waned against the backdrop of improving return profiles for traditional assets and growing investor concern regarding the complexity and quality of liquid alternatives in general. This period of consolidation saw the number of managed futures funds nearly halved to 29 category constituents by the end of 2020, helping to reduce fees and weed out less successful products.“

This introduction is taken from a paper published by AlphaSimplex, a Boston-based registered investment adviser. The history lesson is instrumental in understanding how we got here: witnessing an explosion of ETFs in a space that few retail investors even knew existed just a couple of years ago.

“Renewed interest in managed futures has been stoked by a series of disruptive events beginning with the COVID-19 pandemic, subsequent rising inflation, and geopolitical tensions, to name a few. Additional proof points for systematic trend funds’ diversification potential were particularly clear in 2022. Assets within systematic trend ETFs rose more than six-fold to just under $1.5 billion in the three years ending 12/31/23.

In the five years ending December 31, 2023, the number of ETFs within Morningstar’s Alternative and Non-Traditional Equity category groups grew from seventy-seven ETFs representing $5.7 billion in assets to three hundred eighty representing just under $140 billion in assets.”

Guess why AlphaSimplex wrote the paper? To promote their own managed futures ETF, $ASMF. But today I want to start from another launch in the same area, $MFUT from Meb Faber (he probably bought the ticker 5 years ago, smart fox he is).

$MFUT

The universe of asset classes is broad but unfortunately it does not specify how many markets are traded by the model. What stands out is EM equities and currencies…and crypto.

The number of markets covered by the model is relevant because it brings to the surface some trade-offs: more markets means more opportunities, but it also means potentially less liquidity, more “distractions”, less amount allocated to each trend, more costs and more operational headaches/risks (because collateral is scattered in more places).

The Cambria proprietary model

Bit of “carry” thrown there for good measure? 😉

I am not sure what type of “breakthrough” we are looking at here. I would guess other managers try to improve the returns they earn on collateral. I think the biggest advantage you can get in this field is streamlining how the different collateral “locations” are connected: ideally, you would have all the collateral in the same place but this is not possible because different contracts are traded on different exchanges. But maybe this is relevant only when the fund employs high leverage.

Actually…someone on Twitter pointed me to this paper Med wrote on February this year. Cambria launched an ETF called $TYLD earlier this year, replicating the proprietary model referred to above. And I was not far thinking about carry 😉 Now, the real question is: does this make $MFUT a competitor of $DBMF or of $RSBT? Every managed futures strategy is a “cash plus” strategy but indeed, if here the collateral takes some duration risk…how would I model it in my portfolio? It is a very interesting question, considering I have no way to model this stuff.

The killer application is probably the next one:

Fees

At 0.75%, it is the cheapest on the market.

From 0 Trend Following ETFs to…too many?!?

What’s starting to confuse me is that Chesapeake is also providing their model to $TFPN, another managed future ETF that was launched just some months ago.

The only difference seems to be that here they trade also individual stocks, increasing the universe of traded securities to 500. But it also has higher management fees at 1.10%.

Probably too early to say if they are moving in lockstep or not but will be interesting to monitor for the future.

The “mind” behind Chesapeake is Jerry Parker, a guy who is such a legend in this corner of the financial world that is just referred to as simply as Jerry (I’ve probably listened to 30 episodes of TopTradersUnplugged and ended up asking myself “who TF is this Jerry?”). He’s sort of real-life Eddy Murphy from Trading Places (less the funny part).

The TF ETF space has now attracted storied heavyweights and newcomers:

• $AHLT, American Beacon AHL Trend ETF: Founded in London in 1783, Man Group, AHL’s parent company, is one of the largest publicly listed global hedge fund providers in the world. AHL’s assets under management include a large institutional capital base, including endowments, insurance companies, pension funds and sovereign wealth funds. They trade (more than) 20 markets, target a 15% volatility and charge a 0.95% expense fee. They use volatility scaling, meaning the more a position gets volatile, the lesser exposure it takes (usually when trends get stronger, vol goes up: it is not a given that you should reduce your position).
• $KMLM, KFA Mount Lucas Managed Futures Index Strategy ETF: it trades 22 markets, 11 commodities, 6 currencies, and 5 global bond markets. These three baskets are weighted by their relative historical volatility, and within each basket, the constituent markets are equal dollar weighted. 0.9% expense fee. Mount Lucas is another famous institution but, contrary to Man, I never heard about them before. Their model is quite peculiar and the fact that they do not trade stock indexes offers more diversification (but also more tracking error to CNBC). The index tracked by the ETF was conceived in 1988, so they have a very long track record (gross of fees). They do not have an explicit volatility target for the overall portfolio but leverage each signal by 3x (This is positive because I need a lower dollar exposure to the fund to get proper diversification). Unfortunately (according to me) the fund is distributed by Krane Shares, a team that I am not particularly fond of.
• $CTA, Simplify Managed Futures Strategy ETF: CTA deploys a suite of systematic models that have been designed by Altis Partners, a commodity trading advisor with over 20 years of experience. It trades 15 markets and has no exposure to equities or currencies to maximise risk-adjusted returns and liquidity (so they say). They use fundamental analysis to complement trend models to limit the risk of sudden trend reversals; they also use a carry signal for rates. I invested in CTA and I loved it; unfortunately, Simplify lately made one mess after another (with $CYA and $FIG) and I cannot trust them no more.
• $ASMF, Virtus AlphaSimplex Managed Futures ETF: The ETF takes a diversified approach to identifying price trends by combining index replication techniques with insights from AlphaSimplex’s own trend-following models. It takes positions in highly liquid futures contracts in 20 different assets across global equity, bond, currency, and commodity markets. 0.8% expense fee. This ETF takes the same approach to trend as the guys at Return Stacked: it combines a top-down and bottom-up approach to create a beta exposure to managed futures.

What to say, from zero options to plenty!

Well, if you can invest in US-listed ETFs. If you can only invest in UCITS funds, I am sorry for you. This allows me to tell you something curious from my boring ass life. Weeks ago I listened to this episode of the podcast Flirting with Models. Corey interviewed a guy, that I didn’t know, who lives here in Zurich. I wrote him an objectively lame message on LinkedIn asking to connect; I honestly did not expect anything out of it other than maybe a connection I would never use in my life. The guy actually invited me for coffee (funny enough, his office is right in front of my daughter’s school) so I did some research on his firm and their funds.

They have a retail managed futures UCITS fund with a minimum required investment of (only) 10k. YAY!!!!!

It also charges 2 and 20. In 2024. YIKES 🙁 [we didn’t have said coffee yet, that’s why the story ends here]

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