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Long-Term Mean Reversal is a Good Omen for Managed Futures Strategies

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Long-Term Mean Reversal is a Good Omen for Managed Futures Strategies



November 9, 2017

If you look at some of the best-performing* indices (compounded returns) over the past five years, they will look something like this:

NASDAQ 100 Total Return Index: +224.7%
S&P 500® Total Return Index: +161.5%
MSCI World Total Return Index: +131.5%

At the other end of the scale, when you look at the some of the worst performers* (compounded returns) over the same period, you will come across:

VIX Index: -29.4%
Bloomberg Commodity Index: -21.1%

* Source: Bloomberg, for the five-year period ending October 31, 2017.

What’s interesting about this? Generally, managed futures funds make money in the markets through volatility and commodities. Those strategies take positions in all kinds of futures: stocks, bonds, currencies, sugar, oil, copper and corn, just to name some examples. In the commodity space, the big trends tend to be to the upside. With demand exceeding supply, commodities tend to accelerate higher, and grind lower as more supply comes to market. That’s why commodities can be attractive for investment portfolios, because they tend to act differently from equities and other asset classes. Managed futures strategies try to take advantage of trends in these various futures markets – but recently this has been more difficult.

Why? Not only has it recently been a bear market for commodities, but it has also been a very low volatility environment. For managed futures strategies to be able to capture strong trends, they need both higher levels of volatility and trending commodity markets.

The good news for managed futures strategies is that recently, commodities have been firmer, and while volatility has not returned yet, it is hard to imagine the VIX going much lower than it already has.

If we look at the performance of the Auspice Managed Futures Excess Return Index over the past decade, we can see that the chart looks compelling as well:


Source: Bloomberg, between October 27, 2010 and October 27, 2017.

In the past seven years, we have already bounced off of this level once in 2014 and there appears to be good support at that level after the lows made at the end of July. We are currently sitting close to the seven year lows.

The Horizons Auspice Managed Futures Index ETF (“HMF”) tracks the Auspice Managed Futures Excess Return Index and has even outperformed the underlying index over the past year. (Note: Clicking on the preceding link will open a page which includes HMF’s annualized performance data.)

While many asset classes exhibit short-term momentum, they also exhibit long term mean-reversion. Should this be the case now, we could see both volatility and commodities increase over the next five years. If that’s the case, this could potentially be good news for managed futures strategies and HMF.

Index Performance1

  1 Mo. 3 Mo. 6 Mo. YTD 1 Year 3 Years 5 Years 10 Years 15 Years Inception Date
NASDAQ 100 TR USD 7.77 9.84 6.1 24.61 26.66 78.19 224.7 320.4 487.3 03/04/1999
S&P 500 TR (1989) 5.48 7.99 2.86 12.38 18.91 55.4 161.5 180.07 225.48 11/09/1989
MSCI World All Cap GR USD 4.97 7.82 3.64 14.2 19.21 48.25 131.5 30/11/2007
CBOE Market Volatility (VIX) 10.34 2.28 -11.3 -30.3 -42.61 -17.03 -29.4 -25.43 -76.65 02/09/1995
Bloomberg Commodity TR USD 5.28 5.56 -2.77 -4.63 -1.56 -15.35 -21.1 -33.84 -18.86 12/31/1990


1Source: Bloomberg, as at October 31, 2017.

Past performance is not a guarantee of future results. The indices are not directly investable and the returns shown do not contemplate commissions, fees, expenses, optional charges or taxes which would have impacted an investor’s return.

The views/opinions expressed herein may not necessarily be the views of Horizons ETFs Management (Canada) Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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