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Understanding Managed Futures
Managed Futures is an alternative investment strategy designed with the goal
to provide diversification and help stabilize investment returns.
Because Managed Futures typically exhibit low correlations to other asset
classes such as stocks and bonds, it may provide added diversification to your
portfolio even in difficult market environments. It is designed to help individual
investors by lowering overall portfolio volatility. The strategy may already be
part of your existing portfolio or your portfolio manager may be suggesting its
inclusion.
About TIAA-CREF’s Investment Management Group
The TIAA-CREF investment
process strives to achieve
strong investment
returns, while prudently
managing downside risk.*
Using a proprietary approach to strategic asset allocation, TIAA-CREF’s Investment
Management Group (IMG) constructs personalized portfolios to help meet your
needs. At the heart of IMG is a team of dedicated investment professionals with the
experience, market knowledge and sophisticated technology to evaluate and select
the appropriate strategies and securities for your portfolio, based on your goals and
investment objectives.
The TIAA-CREF investment process strives to achieve strong investment returns,
while prudently managing downside risk. In evaluating each portfolio component, our
investment professionals consider how it should behave under all market conditions.
We know that rigor and consistency are hallmarks of a successful investment process.
With that in mind, our investment professionals periodically monitor your portfolio to
determine that it remains aligned with your investment goals and objectives.
*No method of investing can ensure a profit or guarantee against loss.
Understanding Managed Futures
What is Managed Futures?
Managed Futures is an active investment strategy that primarily uses futures derivatives to
express views on a range of asset classes—stocks, bonds, currencies and commodities. The
name Managed Futures stems from the focus on futures and forwards, because these are the
instruments that are most often used to express a market view that may be positive or negative.
For instance, if an investor thinks that a commodity like oil will rise in value at a later date, then
one way to express that view is to buy an oil future. This reflects the expectation that the actual or
spot price of oil on the future date will be higher than the price indicated by the oil future. In terms
of the Managed Futures investment strategy, it is the view that is important, not the vehicle.
Based on the information
contained on the following
pages, Systematic TrendFollowing Managed Futures
strategies have produced
returns independent of
those of stocks and bonds,
contributing to potential
lower overall portfolio
volatility.
Managed Futures employs two primary investment strategies: Discretionary and Systematic
Trend-Following. TIAA-CREF uses the Systematic Trend-Following Managed Futures strategy.
WW As
the name suggests, the strategy seeks to identify market trends in various asset
classes, and systematically follows these trends by taking long positions in (i.e., purchasing)
investments that reflect positive trends and shorting those that reflect negative ones
(see below for more information on shorting).
WW It
is this type of Managed Futures strategy that has historically generated consistent
returns and may be worth considering for your IMG managed portfolio.*
Historically, these strategies have worked best when price trends have been consistent over
long periods of time. This observation is supported by academic evidence, starting with the
Nobel-prize winning work of behavioral economists Daniel Kahneman and Amos Tversky in
the 1970s. Their work and subsequent economic studies show that trends in financial
markets have often occurred because of longstanding behavioral biases among investors.
Some of these biases will be familiar, such as herding, a phenomenon in which investors
gravitate to the same investments simply because others are doing so, and anchoring, in
which investors tend to hang on to investments hoping that they will break even or return to
the purchase price against all evidence to the contrary.
Of course, markets do not always exhibit trend-following behavior. At times, markets
move up quickly and then down just as quickly. During choppy markets, Systematic TrendFollowing strategies may not be as effective as they are in markets that trend either up or
down for extended periods. However, we have seen that these strategies have been
effective in times of precipitous decline or ascent.
Understanding short selling
Shorting, or short selling, is the practice of selling an asset not currently owned and
then repurchasing it at a later date in a process known as covering. If the value of
the asset drops in the intervening period, the seller will profit as s/he will be able to
buy the asset at a lower price, deliver it to the buyer and pocket the difference.
Shorting is common in futures markets because they are large, highly liquid and have
a great deal of real-time information. Shorting is not without risk, however, because
assets may increase rather than decrease in price during the period between selling
and covering, resulting in a loss for the investor.
*Past performance is no guarantee of future results.
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Understanding Managed Futures
How do Managed Futures work?
The mechanics of Managed Futures are multi-faceted and involve trading a range of highly
liquid, exchange-traded derivatives contracts, including futures and forwards. Specialist
investment managers called Commodity Trading Advisors (CTAs), regulated by the National
Futures Association and the Commodity Futures Trading Commission, use sophisticated
technology and quantitative modeling to systematically identify the trends they wish to
follow. They then build portfolios of contracts from the bottom up, taking both long and
short positions that reflect their market view of particular assets.
Instead of investing in
the “now,” Managed
Futures has the flexibility
to buy or sell futures
contracts. This distinction
has helped them to
perform well in a variety
of market conditions.
The use of futures and other derivatives give CTAs the flexibility to buy (go long) or sell
(go short) derivatives contracts. This is an important distinction that has helped Managed
Futures to perform well in a variety of market conditions. Typically, the CTA would take long
positions in assets that are moving upwards and short positions during times of falling prices.
Why consider Managed Futures for your portfolio?
Improved diversification through lower correlation
One of the key attributes of the Managed Futures strategy is its ability to hedge the returns of
stocks, bonds and commodities. Diversification is demonstrated through correlation, or the
degree to which assets move in tandem during different market conditions. As the chart
below shows, Managed Futures has low correlation to commodities, equities and fixed-income
securities over a 12-year period that included two bear markets. The diversification benefits
were most significant during those bear markets, when Managed Futures provided positive
returns when the other asset classes were under pressure. When added to a portfolio of
traditional investments, Managed Futures has the potential to help stabilize and smooth
returns over time.
Correlation of various asset classes, from January 2000 through
June 2015 using monthly observations.1
Managed Futures
Commodities
Equities
Managed Futures
1.00
Commodities
0.09
1.00
Equities
-0.22
0.38
1.00
0.20
0.05
-0.09
Fixed Income
Fixed Income
1.00
Managed Futures exhibits low correlations to other asset classes.
Source: Bloomberg, as of June 30, 2015. The following indices were used to represent each asset class:
Managed Futures—Credit Suisse Managed Futures Liquid Index, Commodities—Bloomberg Commodity
Index, Equities—Russell 1000 Index, and Fixed Income—Barclays Capital U.S. Aggregate Bond Index.
Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect
against loss.
1
3
Understanding Managed Futures
Potential for reduced long-term portfolio volatility
Because Managed Futures can react quickly to movements through both long and short
positions, it can dampen the volatility of a portfolio invested in stocks and to a certain
extent, bonds. Volatility is a measure of risk associated with the portfolio. Measures taken
to curtail this risk are generally called hedges, as in a method to hedge against loss. In the
context of portfolio construction, Managed Futures can offer returns with less volatility,
thereby providing a hedge against the risks associated with higher-risk asset classes. This
effect has shown to be most pronounced over time, as the chart below indicates.
Growth of $1 in a variety of asset classes since January 2000
$4.00
$3.50
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$0.50
Credit Suisse Mgd Futures Liquid
Bloomberg Commodity
Russel 1000
Barclays US Agg Bond
Managed Futures cumulative return has outperformed other major asset classes.*
Past performance is no guarantee of future results.
Source: Bloomberg, Morningstar and IMG Analysis. The following indices were used to represent each asset class:
Managed Futures—Credit Suisse Managed Futures Liquid Index, Commodities—Bloomberg Commodity Index,
Equities—Russell 1000 Index, and Fixed Income—Barclays Capital U.S. Aggregate Bond Index.
*Past performance is no guarantee of future results.
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Understanding Managed Futures
For more information
To understand how Managed Futures may help the performance of your
portfolio, please contact your TIAA-CREF Investment Professional.
Private Asset Management services are appropriate for clients with at least $1,000,000 in investable assets to
be managed by the TIAA-CREF Trust Company, FSB. The TIAA-CREF Trust Company, FSB charges a fee based on
a percentage of the asset value of the client’s account (subject to a minimum fee).
Investment products are not insured by the FDIC; are not deposits or other obligations of
TIAA-CREF Trust Company, FSB; are not guaranteed by TIAA-CREF Trust Company, FSB; are not a
condition to any banking service or activity; and are subject to investment risks, including
possible loss of principal invested.
The information provided herein is for informational purposes only. It does not constitute an offer
or recommendation to buy or sell any security. Certain strategies may not be suitable for all
investors. The views expressed in this newsletter may change in response to changing economic
and market conditions. Past performance is not indicative of future returns.
TIAA-CREF Trust Company, FSB, provides investment management, custody and trust services. Advisory
services are provided by Advice & Planning Services, a division of TIAA-CREF Individual & Institutional Services,
LLC, a registered investment adviser.
©2015 TIAA-CREF Trust Company, FSB
C25443
141010112
(09/15)