Managed futures funds stand out as a rare bright spot in a tough market. Here's how they work

Published Fri, Oct 14 20221:58 PM EDTUpdated Fri, Oct 14 20222:09 PM EDT

Positive returns have been few and far between this year as Federal Reserve-induced volatility wreaked havoc on Wall Street, but one strategy turned out to be a rare bright spot, with funds using it returning as much as 50% year to date. The winning strategy relies on managed futures. Unlike traditional stock-picking funds, managed futures is momentum- or trend-following based, with traders relying on systematic models to execute bets. These portfolios are usually comprised of global futures contracts across different asset classes, both long and short. There are five exchange-traded funds based on managed futures strategy on the market today. The biggest one — iMGP DBi Managed Futures Strategy ETF with over $1 billion in assets under management — has rallied more than 33% this year even as stocks and bonds have both recoiled. The S & P 500 has fallen more than 20% in 2022 amid soaring inflation and aggressive Fed rate hikes. IShares Core US Aggregate Bond ETF is down more than 16%. "Managed futures ETFs like DBMF are built to provide exposure to alternative investments [rather] than going long traditional stocks and bonds," said Todd Rosenbluth, head of research at VettaFi. "They invest long and short in commodities, currencies and other investments and tend to zig when the market zags." He added that DBMF was long oil and short Treasuries at times during 2022. VettaFi's ETF database showed $1.4 billion of net inflows to managed futures ETFs in 2022, led by $893 million for DBMF and $226 million for the KFA Mount Lucas Index Strategy ETF (KMLM). KMLM is the best performing fund in the group, up a whopping 50%. The fund consists of 22 liquid futures contracts — 11 commodities, 6 currencies and 5 global bond markets. These three baskets are weighted by their relative historical volatility. Read more This ETF topped $1 billion in assets this week as investors flock to managed futures strategies Strategists say managed futures funds could help smooth portfolios due to the uncorrelated nature of the returns, particularly to traditional assets such as stocks and bonds. "This is really a true alternative return premium that's not going to have correlation to any of those asset classes that an investor will have in their portfolio," said Ryan Issakainen, an exchange-traded fund strategist at First Trust. "You're diversifying among a variety of different asset classes" The First Trust Managed Futures Strategy Fund (FMF) is up about 15% this year. Issakainen said the fund is currently net short. — CNBC's Jesse Pound contributed reporting.

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