As risk-on assets tanked and monetary policy gravity hit the bond markets, managed futures enjoyed a vintage year.
Managed futures, also known as CTAs, invest in the futures markets, where they take long and short positions on a wide array of asset classes, including equity indices, government bonds and interest rates, currencies and commodities.
Asset allocators should have seen it coming.
After all, managed futures have plenty of form. They have proved to be a reliable risk-mitigating strategy and outperformer when markets turn choppy.
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They had strong gains during the dotcom crash and the global financial crisis - and now they have passed the litmus test of historic Federal Reserve tightening.
Thus, they should have essential place in any truly diversified portfolio.
So how did managed futures top the field in a tumultuous year for the global economy and markets?
How hedge funds bounced back
Before 2022, the shine had long left the last golden age of hedge funds.
As equities and bonds enjoyed an unprecedented bull run, the diversification benefits of liquid alternatives and hedge funds had retreated to the fringes of asset management.
The asset class was not quite dead, but it was in deep hibernation, especially among European investors.
Institutional investors were no longer interested in absolute returns when equities were providing solid performance on average, and bonds theoretically acted as a ballast between any stormy seas that lay ahead.
Between 2010 and 2021, the classic 60/40 balanced portfolio comfortably produced high single-digit returns for investors.
Then the winds changed. War in Europe for the first time since World War II accelerated an inflationary surge already started by post-lockdown recovery, and the consequences of monetary largesse came home to roost. Central banks, on the back foot, moved to control the narrative.
The Fed took the most strident action - aggressively hiking interest rates.
This created a cascade of economic volatility, large market moves and higher dispersion among sectors and companies, exactly the conditions that favour hedge funds -and among hedge funds, managed futures stood out.
As some strategies experienced waves of redemptions, managed futures delivered performance and strong diversification.
Investor democratisation
The CTAs or trend-following strategies that underlie managed futures funds typically use computer-based models to take long and short exposure on directional signals and themes across a range of assets.
This approach successfully capitalised on strong trends in H1, namely the strengthening dollar, bear market in US government bonds, and rising commodity prices. While the traditional asset classes buckled under the pressure of a new monetary regime, managed futures thrived.
When the tide went out, investors relying on diversification between bonds and equities were found to be swimming naked, while managed futures were in crash protection mode.
For example, as the major fixed income and equity indices tumbled in 2022, the iMGP DBi Managed Futures Strategy ‘DBMF' has posted a 24.5% year-to-date return as of 25 November.
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In generating this performance, the fund also cut out arguably the steepest barriers to access for fund selectors when considering exposure to the hedge fund space.
Firstly: single manager risk. The strategy replicates the performance of 20 differently managed CTA hedge funds.
By taking the average performance, the fund can mitigate the bias and avoid betting the house on a single CTA manager's perspective.
The strategy also has access to ‘closed' strategies, normally the preserve of a select group of elite asset allocators.
The second barrier is fees, which also represents another major hurdle to investor democratisation.
The fund avoids exorbitant charges to investors, which have been negatively associated with hedge funds since the industry's inception and has blocked access to smaller investors.
Instead of the traditional ‘Two and Twenty' fee structure, DBMF, for example, charges a flat annual management charge of 0.85% and no performance fee at all.
It is therefore unsurprising then that the fund has attracted strong inflows this year, growing from $60m at the end of 2021 to over $1bn.
Managing the future
As 2022 approached, managed futures funds and consequently DBMF were already positioned for the changing environment and the new inflationary landscape.
In this new era, the 60/40 model came under pressure and investors realised that failing to have appropriate diversification across alternative asset classes left them open to a rise in correlations between stocks and bonds.
The key lesson of 2022 for asset allocators is that in constructing robust portfolios, we must never forget that true diversification is investment's only free lunch.
Moving forward, the inclusion of low fees diversified managed futures strategies into broader portfolios should not just be seen as a shock absorber during inclement economic weather, but also as another powerful generator of long-term returns.
Philippe Uzan is CIO, asset management at iM Global Partner