Managed futures strategies, also known as Commodity Trading Advisors (CTAs) or trend-followers, are designed for environments where macro shifts drive persistent price trends across equity, bond, commodity, and currency markets. As geopolitical risk has spiked due to the conflict with Iran, the current backdrop will present a unique test for investment strategies.
Current Positioning
Using the SG Trend Indicator from Societe Generale Prime Services as an industry proxy, the most recent positioning by asset class is below. Note, depending on a manager’s individual contracts traded and portfolio construction process, exposures will differ from this. The SG Trend Indicator uses a 20-day/120-day moving average crossover for signal generation. The longer this signal is intact, the larger the position size, however, scaled for expected volatility.
- Equities: Except for a short NASDAQ futures position, there is long exposure across domestic and international developed equity markets.
- Commodities: Long exposure across precious/base metals, crude oil, and livestock contracts. Short exposure within agricultural contracts such as coffee, cocoa, and cotton.
- Bonds: Mixed long and short exposure depending on region and maturity levels. Short middle of the U.S. Treasury curve, however, limited directional exposure overall.
- Currencies: Long euro, British pound, Canadian dollar, and peso versus the U.S. dollar. Long U.S. dollar versus the Japanese yen.
Potential Impact of Rising Geopolitical Risk
Historically, similar periods have caused a rush to safe-haven assets, the selling of risk, and a sharp increase in energy prices. Below, we have the potential impact based on the positioning described above:
- Equities: If equity markets continue to sell off, there may be a short-term drag on overall performance due to current long exposure. However, as signals are moderate, a sharp or extended decline could lead to outright short positioning.
- Commodities: Crude oil prices have already experienced a sharp increase, supporting existing long exposure.
- Bonds: Increasing demand for Treasuries is expected during periods of market volatility. As current Treasury exposure is mixed, investor demand across the yield curve may drive any shifts in exposure.
- Currencies: A flight to safe-haven currencies would negatively impact existing short U.S. dollar exposure over the short-term.
LPL Research Takeaway
The Iran conflict has introduced significant macro risk and volatility into global markets. For managed futures, this environment underscores their purpose of providing dynamic diversification by investing long and short across equity, bond, currency, and commodity futures. Over the short-term, we expect current long energy exposure to drive gains, however, long equity and short U.S. dollar exposure are expected to weigh on returns. For managed futures to deliver as a source of crisis alpha, price trends need to persist, or many strategies and signals will be whipsawed and constantly reversing – one of the worst possible environments for the industry. Overall, within managed futures, we continue to favor holding a diversified mix of sub-strategies, including but not limited to, short-term momentum, volatility breakout, pattern recognition, and trend following. Diversification within trend following in terms of markets and time frame is encouraged as well.
Michael McClain, CFA, is responsible for liquid alternative due diligence and alternative investment implementation across LPL’s centrally managed platform.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor's holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
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