Diversification remains the Holy Grail when it comes to managing client portfolios. An ideal diversifier would provide low-volatility, largely positive returns and low or negative correlations with clients' existing assets, since the goal is to achieve an improvement in the portfolio's risk-adjusted returns.
A recent white paper from San Francisco-based Forward Management makes the case that managed futures can accomplish those goals. Their argument: the Barclay Commodity Trading Advisor (CTA) Index has produced long-term returns that match the S&P 500 Index and outperformed the Barclays Capital U.S. Aggregate Bond Index.
During the 1980-2011 period, the CTA Index was slightly less volatile than the S&P 500. Plus, it has also significantly lower one-month maximum losses, as shown in the following table:
Comparison of Monthly Returns by Asset Class: 1/1/1980 – 12/31/2011
| Annualized Return | Standard Deviation | Maximum Monthly Decline | Correlation to the S&P 500 | |
| Barclay CTA Index | 11.16% | 15.07% | -9.81% | 0.01 |
| S&P 500 Total Return Index | 11.06% | 15.62% | -21.54% | 1.00 |
| Barclays Capital S.S. Aggregate Bond Index | 8.69% | 5.69% | -5.92% | 0.20 |
Source: Forward Investing
These results have attracted the attention of both investors and funds. Forward Investing notes that assets under management by CTAs grew from $10.9 billion at year-end 1990 to $37.9 billion by year-end 2000; that figure grew to $314 billion by year-end 2011.
Caveats are in order, of course. Unlike stock and bond indexes, the CTA Index is based on the results of a peer group of managers, not price changes in a set of securities. That means your clients can't simply buy the CTA Index as they can a traditional securities index.
