Managed Futures Shine During Macro Volatility

Volatility seems to have been the theme of this first quarter of 2022; inflationary concerns, geopolitical tensions and risks, and rising rates in the U.S. have all created a difficult investing environment. Most major asset classes such as stocks, bonds, and real estate have largely been down for the year so far, and some long volatility strategies and tail risk strategies have also been down, wrote KFA Funds in a recent paper.

The KFA MLM Index, an index of managed futures contracts of 11 commodities, six currencies, and five global bond markets is up for the year, with the ETF that tracks it, the KFA Mount Lucas Index Strategy ETF (KMLM), up 20.49% YTD while all of the major asset classes are negative for the year so far. The index was created in 1988 and measures the returns to risk-bearing within the futures market and has historically performed strongly in downward and bear markets.

The index and KMLM offer possible hedges for equity, bond, and commodity risk and have demonstrated negative correlation to both equities and bonds in bull and bear markets. Investing in managed futures offers diversification for portfolios, and carrying them within a portfolio can potentially help mitigate losses during market volatility and sinking prices.

Image source: KFA Funds white paper

“In years where we’ve witnessed market volatility, having a managed futures investment in your portfolio, potentially has the effect of allowing you to hold your stock and bond investments through tough times, being in a position for the eventual recovery,” according to KFA Funds.

Investing in Managed Futures

The KFA Mount Lucas Index Strategy ETF (KMLM) from KFAFunds, a KraneShares company, offers investment with managed futures.

KMLM’s benchmark is the KFA MLM Index, and the fund invests in commodity currency as well as global fixed income futures contracts. The underlying index uses a trend-following methodology and is a modified version of the MLM Index, which measures a portfolio containing currency, commodity, and global fixed income futures.

The index weights the three different futures contracts types by their relative historical volatility, and within each type of futures contract, the underlying markets are equal dollar-weighted. Futures contracts will be rolled forward on a market-by-market basis as they near expiration.

The index evaluates the trading signals of markets every day, rebalances on the first day of each month, invests in securities with maturities of up to 12 months, and expects to invest in ETFs to gain exposure to debt instruments.

KMLM carries an expense ratio of 0.90%.

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