Over the past couple of months, managed futures has been the financial community punching bag. As stocks and managed futures struggled in tandem, critics began to question the non-correlation that is often viewed as the most desirable component of a managed futures investment (here and here, just for example).

While the uninformed were questioning why managed futures were going down along with stocks (the classic fallacy of confusing non-correlation with negative correlation), managed futures were busy behind the scenes switching their positions around. They were getting stopped out of long stock index, grain, and energy positions  and putting on new long positions in things like the Yen and Swiss Franc, while a few even went short foreign stock indices.

So while managed futures were in positions positively correlated with the movement of stocks in May and June – they aren’t any more. Many programs have since exited those positions which caused that positive correlation, while also getting into negatively correlated positions.

The results: with stocks down -2.15% in July, managed futures were up 3%. So far in August, managed futures are looking at gains thus far of 0.50% while stocks are continuing to struggle down –3.20% (and counting today…).

What changed from May/June to July/Aug?  What did managed futures start doing differently?

Nothing.

Managed futures did not change what they do, or how they do it. All that changed was the market, and in turn the positions managed futures programs were holding.

And that’s the whole point here – managed futures, generally speaking, wait for price to dictate when their positions should change from long and positively correlated with the stock market to short and negatively correlated to the stock market. And it can happen just that fast – with investors lamenting the positive correlation in June and cheering the negative correlation in May. One month managed futures performance may directly shadow stocks, and the next they’ll be headed in the opposite direction.  That is what non-correlation looks like, as we mentioned in a recent newsletter. It does not always take on the shape of stocks down/managed futures up.  It sometimes does, and usually does when markets make an extended move downwards – but not always. That is both the beauty and frustration of managed futures.