With Bill Gross calling the Fed’s extending of the zero rate period into 2014 today the equivalent of QE 2.5, we continue to sigh. Zero level rates aren’t exactly what we’d hoped for. After all, one of the benefits of investing via managed accounts is the ability to fund your account with tbills- gaining interest as you do. A 5% tailwind in your managed futures account is a whole lot better than a 0% tailwind, that’s for sure.
But how much of a benefit is that tailwind anyway? If it was a big part of managed futures returns, we would expect managed futures to have much better performance during higher rate periods. And indeed, one of the common (uninformed) complaints you hear about managed futures performance over the years is that it’s been inflated by this ability to earn the returns from managed futures alongside the T-Bill returns, creating what some would call artificial strength. This argument is definitely aided by the performance of managed futures over the past three years when interest rates have essentially been at 0%. Returns for managed futures as an asset class (based on the Dow Jones Credit Suisse Managed Futures Index*) over that same three years is just +0.69% per year on average.
The critics would have you believe that managed futures returns would have something like the following relationship with T-Bill rates:
But we actually ran the data back to 1994 to see how it really looks. We found there were essentially five different rate periods during the past 18 years, with rates spending an average of 3.5 years at either 0%, 1%, 3.5%, 4.5%, or just over 5%.
| Years |
High |
Low |
Avg |
| ’09,’10,’11 |
0.14% |
0.03% |
0.10% |
| ’02,’03,’04,’08 |
1.66% |
1.03% |
1.38% |
| ’94,’01,’05 |
3.99% |
3.01% |
3.56% |
| ’98,’99,’06 |
4.73% |
4.51% |
4.64% |
| ’95,’96,’97,’00 |
5.76% |
5.02% |
5.34% |
And then all that was left was to see how managed futures as an asset class performed (based on the DJCS index*), on average, during each of those periods. The results…
Disclaimer: Past performance is not necessarily indicative of future results.
What we see is that there is essentially no connection between where rates have been over the past 18 years and where managed futures ended up those years, with the average performance highest in the 2nd lowest rate environment, and the 2nd lowest performance in the highest rate environment – not at all the scenario the critics would have you believe where managed futures do worse and worse as rates go lower and lower.
So, assuming our hopes for strong managed futures performance this year are realized, and assuming rates do continue to scrape the bottom of the barrel, managed futures critics may have one less thing to whine about.