By Jack Hough

How's your crisis alpha? The managed futures industry is asking. It would like to pitch you on a fund that can beat other stuff (the "alpha") when your stocks are falling (the "crisis"). Isn't that what bonds are for, you ask? Yes, but 60/40 investing is apparently for bumpkins. What's really needed is a go-anywhere, long/short, derivative trend-trading quantitative model. What are the fees? The industry would rather you didn't ask for now, but we'll come to it.

Last week, I wrote about some ways to hedge against a decline in the S&P 500 index. I disliked all of them to varying degrees, except for buying overseas stocks dutifully, and bonds willingly, if not quite cheerfully. Some readers emailed to ask about things I left out, like managed futures and commodities, especially gold. Let me touch on those now, with the disclaimer that I dislike most things that Wall Street recommends, whether because most things are bad or because I'm becoming old and cantankerous -- it's difficult to tell the difference.

Futures are contracts that can be used to bet on the direction of stock indexes, government bonds, commodities, and currencies. There are money managers called commodity trading advisors, or CTAs, who follow diversified futures strategies -- and not just for commodities, despite their name. One common strategy is trend-following, which involves using software and charts to bet on markets that are rising and against ones that are falling.

This isn't new. Managed futures have been around for just over 75 years. What's new is the rising number of exchange-traded funds that offer easy access, and the promotion of these funds as tools that ordinary savers need. Just this month, BlackRock launched the iShares Managed Futures ETF, promising a "unique source of return" to "diversify a portfolio." A one-pager shows managed futures making money through the dot-com crash that started in April 2000, the global financial crisis in October 2007, and other stock mishaps.

Peak glory might have come from January through October 2022, when inflation roared, both stocks and bonds stumbled badly, and managed futures tacked on more than 20%. Around that time, iMGP DBi Managed Futures Strategy, the biggest ETF, topped $1 billion in assets. There are other ETF choices from Simplify, KraneShares Mount Lucas, WisdomTree, and First Trust, plus many traditional mutual funds, totaling $349 billion in managed futures strategies, up from $10 billion in 1990. It should be more, the industry argues, but investors are turned off by what they see as complexity.

How much do managed futures return? There are two ways I can answer that question. There's an index of popular strategies from Société Générale called SG CTA that goes back to 2000. Morningstar just under a year ago found that it had returned 4.8% a year, versus 5.9% for global stocks and 3.9% for global bonds. That's impressive, even if global stocks haven't done nearly as well as U.S. stocks in recent decades, and if high managed futures fees -- 1.5% to 2.2% on many funds -- can erase the edge over bonds. So far this year, the index, down 2.1%, isn't providing much crisis alpha, but then, this isn't much of a crisis, with the SPDR S&P 500 ETF recently down 2.8%, and the Schwab US Aggregate Bond ETF up 2.9%.

The other answer is, I don't know. Managed futures are a strategy more than an asset class. I've heard that these funds provide exposure to commodities and currencies, but that's like saying that betting on college basketball provides exposure to the sporting industry. What it really provides is exposure to betting skills or systems. Stocks are four centuries old, with around one-and-a-quarter centuries of decent price data, and there remains a lively debate over just what level of return is normal for them. We know less about managed futures, including what effect the rising popularity of trend following will have on trends.

What we can confidently say is that returns for managed futures bear little resemblance to stock and bond returns. That makes them mathematically useful for diversification. But then, chicken poop bingo provides low return correlation to stocks and bonds, too. I don't recommend it for long-term wealth building.

The good news is that fees are probably headed lower. That iMGP fund uses a follow-the-trend-followers approach to keep expenses down to 0.85%. The new iShares fund comes in even lower, at 0.8%.

It's ironic that death-of-60/40 conversations ramped up late in 2022, after both stocks and bonds had gotten clobbered. In hindsight, the time for those talks was before 2022, when bonds were yielding near zero. If they go back there again, I'd give the nod to managed futures over chickens and bingo tables for a diversifier. For now, I think savers can do without them.

Now here's some crisis alpha: Gold is up 15% this year. The broader iShares S&P GSCI Commodity-Indexed Trust is up 2.8%. How about commodities for a hedge?

The problem is that commodities are stuff, and we have a measure of how the price of stuff (and services) behaves over time. It's called the rate of inflation, and the goal for investors is to beat it, not match it. History suggests that bonds beat inflation by a little and stocks beat it by a lot. For stuff, I don't know how to accurately predict which items will race ahead of or fall behind the others in the near term, whether from shortages, industrial demand, or speculation. If I did, I'd have put this column on hold a year ago to launch the 3x Bullish Eggs Power Alpha Trend Trader ETF, ticker YOLK, and I'd be clucking now about the 133% run-up on the price of a large, white dozen, instead of griping about my omelet expenditures.

But at least some of the companies in my cheap stock index funds produce stuff, including gold and eggs, and others sell equipment for stuff production, and still others manufacture stuff into even more valuable stuff. I guess that makes me accidentally neutral, bordering on involuntarily bullish.

Write to Jack Hough at jack.hough@barrons.com

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March 21, 2025 03:00 ET (07:00 GMT)

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