With heavyweights like Pacific Investment Management Company throwing its hat into the managed futures mutual fund ring, interest from both investors and asset management in this investment vehicle appears to be rising.
On August 16, PIMCO filed a preliminary prospectus with the SEC, which calls for the mutual fund offering that "seeks absolute risk-adjusted returns." The PIMCO TRENDS Managed Futures Strategy Fund serves as the 42-year-old firm's new mutual fund in the space.
"The Fund seeks to achieve its investment objective by pursuing a quantitative trading strategy intended to capture the persistence of trends (up and/or down) observed global financial markets and commodities," the prospectus reads.
While a PIMCO spokesperson was unable to comment on the fund, analysts from independent research firm Morningstar indicate that the interest from the investment management firm with nearly $2 trillion in assets under management is emblematic of an overall shift in assets among certain alternative vehicles.
"I think it shows that there is a demand even though the managed futures as a category has performed poorly for the past few years," said Phil Guzeic, a Morningstar analyst. "It's not necessarily that it discreetly is a big deal, it's just indicative of the trend in the industry that there are these persistent trends systematically over time, investors want access to them, and it's getting more liquid and cheaper to get this access."
Morningstar data indicates that U.S. open-end managed futures mutual funds have increased in total net assets and funds since 2008. As of July 31, there were 52 total funds and over $10 million in net assets for the managed futures category. But in the 2008-2013 period, the number increased from one in 2008 to 52 in 2013, which points to a growing demand in this niche investment area.
According to Morningstar, managed futures funds managed by Paris- and Boston-based Natixis Global Asset Management's AlphaSimplex and Credit Suisse, with offices in New York, have been able to post good numbers when compared to the year-to-date ending in August. The Credit Suisse Managed Futures Strategy Fund and the Natixis ASG Managed Futures Strategy Fund bulldozed through the managed futures category's return for the year-to-date, and publicized positives in the 4-6% return range.
Overall, managed futures have posted negative returns for the year-to-date at -3.20% and the one-year at -7.58%. When compared to conventional markets, the S&P 500 Index and the Barclays Capital U.S. Aggregate Bond Index were polar opposites over the same periods of measurement. For stocks, figures were near -0.08% for the year-to-date and nearly hit an 18% return for the one year. Bonds fared much worse when the Barclays Capital Indices benchmark reached about -2.84% and -2.12 for the one year and year-to-date at the end of last month.
Jordan Drachman, portfolio manager of the Credit Suisse Managed Futures Strategy Fund, said the managed futures strategy "essentially does well when you have stable trending markets."
"We've seen some steady trends, for instance a lot of fixed-income has been going down, and equities have been steadily going up and those types of trends can create a good environment for a managed futures strategy," Drachman explained.
Decision makers at the Natixis ASG Managed Futures Strategy utilize similar tactics.
"We believe it has been a high performer because it doesn't focus on a fixed set of time horizons for identifying trends, but rather is adaptive based on the recent environment," said Jerry Chafkin, president of Cambridge, Mass.-based AlphaSimplex Group.
The '40-Act structure warrants mentioning because open-end mutual funds need to be transparent and disclose financials. An inherent problem in the '40-Act format is daily pricing on managed futures funds, which are essentially a hedge fund-like vehicle.
"The one nuisance is that some '40-Act mutual fund requirements preclude taking positions that will be physically delivered or they have to be 100% collateralized, which doesn't allow for the amount of leverage in these managed futures positions," Guzeic explained. "They have to access the strategies through a swap agreement through a bank, and they will do a total return swap, so they don't have physical delivery."
This swap is costing 20-30 basis points, according to Guzeic, who added that customary hedge fund compensation was in the "two and twenty" range.
Due to its characteristic to take various positions in futures and option swaps, the industry has been under added regulatory scrutiny by the Commodity Futures Trading Commission. On August 13, following news that the U.S. Court of Appeals for the D.C. Circuit had upheld the CFTC's amendments to Commission Regulation 4.5, the CFTC said that it would adopt "harmonization" rules for companies registered with both the SEC and the CFTC.
This means that commodity pool operators of investment companies under the '40-Act umbrella will "accept the SEC's disclosure, reporting and recordkeeping" systems going forward. The agency did not respond to our requests for comment.
When the U.S. Court of Appeals first accepted the watchdog agency's appeal, mutual fund executives and the industry saw the added financial inquiry as a "redundant regulation," according to the Investment Company Institute.
In a statement, the ICI said previously that it was "currently reviewing the CFTC's latest release in detail" as it was adamantly against the agency's proposed amendments from February 2011 due to "duplicative burdens and unnecessary costs on funds and their investors."
Last week, an ICI spokesperson disclosed that it was still reviewing the proposed harmonization rules and would be unable to comment on specifics.
Industry players like Chafkin are less worried because "regulations governing exchange traded futures contracts are already established for the most part."
"We believe this process will be good for managed futures strategies as regulatory clarity reduces regulatory risk and broadens interest," Chafkin said while noting that adopted harmonization rules can rectify instances where both agencies' rules conflicted.
Shifts in assets from the hedge fund industry to the '40-Act structure for liquidity purposes may "drive additional launches because investors prefer the oversight, liquidity of a '40-Act fund," Guzeic said.
However, for the funds already established, they are happy with the inflows wherever they are coming from.
"I think what we've seen is an interest in managed futures as a strategy in general, because over the long term it does have a low correlation to most other asset classes because it can go long and short in different asset classes," Drachman noted.
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