We’re not alone in wondering what’s behind lackluster managed futures performance lately. Our newsletter “Is Trend Following Dead” inspired a vigorous LinkedIn debate about the asset class’s woes, with theories ranging from the rise of HFT to government intervention in the markets offered as an explanation for the problem. But there’s another common criticism of managed futures that has been offered as an explanation – an article from CityWire Wealth Manager presents the idea that the low interest rate environment has been hurting managed futures performance:

‘We believe that a major portion of the CTA returns prior to 2009 came from the interest income, says Peter Kambolin, chief executive of Systematic Alpha Management. ‘If on average, CTAs use 15% or less of equity for margin-to-equity purposes, that means that at least 85% of assets under management in the past generated 3%-4% per year in interest income from investments into Treasuries and short-term commercial paper.

‘That accounts in some cases to over 50% of CTA net returns on the year. Clearly, since interest rates have dropped to nearly 0% level, CTAs have not been able to produce any returns.’

This sounds intuitive, but the problem is it just doesn’t stack up when you look at the historical record. We tackled this hypothesis once before, and found that, while managed futures has historically experienced lower performance in very low interest rate environments, managed futures has also seen lackluster performance during periods of higher-than normal interest rates, too.

Disclaimer: past performance is not necessarily indicative of future results.

The best performance has tended to come during periods of middling interest rates.  In other words, interest rates are not a not a cut-and-dried indicator of managed futures success. That being said, a sustained increase in interest rates would certainly be welcome for managed futures – and not just for the T-bill tailwind. But CTAs can enjoy the bond trade even when interest rates are bumping up against the zero bound. So this is another hypothesis that, while sounding reasonable, doesn’t quite stand up under scrutiny.