Managed futures used to be a little-known subset of the hedge fund industry, with a meager $10 billion in assets under management as recently as 1990. In the 20+ years since, the industry has become a huge (and growing) part of the world of managed money. The last few years have certainly shaken investors’ faith in the ability of traditional portfolios to withstand severe economic shocks, and they are increasingly turning to managed futures to mitigate their long-tail risk. Via Hedge Funds Review:

While it is no surprise that institutional investment in funds of hedge funds (FoHFs) has fallen dramatically, hedge funds have not gained as much from the focus on tail risk as expected, according to research* by State Street Global Advisors (SSgA). More than 300 institutional investors from Western Europe and the US are united in their interest in using CTA/managed futures as both an effective and value-for-money way to hedge tail risk.

In the US investors have changed their tail risk strategies by allocating more to other alternatives and managed volatility equity strategies at the cost of single-strategy hedge fund and FoHF allocations and direct hedging. In Europe, however, the response has been different. Managed volatility equity strategies have gained most favour with other alternative allocations and managed futures/CTA also benefiting from a shift in allocation.

Long-tail risk, or just tail risk, refers to those huge, rare events that sweep through more often than we’d like to devastate unprepared portfolios (the financial crisis of 2008 comes to mind). And, while past performance is not necessarily indicative of future results, managed futures has historically performed very well during those periods. Just how much has that translated into assets raised? With August’s final tally on the books, BarclayHedge puts the total size of the industry at $334.7 billion. Via Barclayhedge:

Commodity Trading Advisor (CTAs) funds took in $2.1 billion (0.6% of assets) in August, their seventh inflow in the past eight months and a 151% jump from $848 million in July. Three of the six major CTA categories had inflows in August. January to August 2012 flows into CTAs totaled $10.1 billion (2.9% of assets) and 12-month flows totaled $5.9 billion (1.6% of assets).

As Hedge Funds Review also noted, the world of traditional hedge funds has experienced a net outflow of assets in 2012, declining -0.8% so far this year, in part due to significant outflows from the fund of funds category. Managed futures just keeps on climbing, and now stands at one-fifth the size of the rest of the hedge fund industry. Aside from a dip in AUM between 2008 and 2010, managed futures has experienced fairly consistent growth throughout the last decade:

Source: BarclayHedge

As we’re fond of saying, the time to diversify is before a crisis hits. With stocks nearly back to their pre-recession levels, now appears to be an excellent opportunity to do just that. And we’re glad to see that at least some investors appear to be taking our advice.