Managed Futures (Trend Following): The ‘Crisis Alpha’ That Profits When Stocks Crash
Managed Futures (Trend Following): The ‘Crisis Alpha’ That Profits When Stocks Crash
COACHING POINTS
- The Mechanics: Trend Following algorithms don’t predict the future; they react to the present. If Oil is going up, they buy Oil. If the Yen is crashing, they short the Yen. They ride the wave until it breaks.
- The Diversifier: In 2022, both Stocks and Bonds fell double digits. Managed Futures rose +20% to +30%. Why? They profited from shorting bonds (betting on rising rates) and longing energy (inflation).
- The Portfolio Role: You don’t buy this for massive growth in a bull market. You buy it as “insurance that pays you.” Allocating 10-15% to Managed Futures smoothes out the ride and reduces maximum drawdown.
Most portfolios are betting on one thing: “The world will be stable and grow.”
Managed Futures take the opposite bet. They thrive on instability, inflation, and panic.
While everyone else is losing sleep over a market correction, Trend Followers are harvesting profits from the chaos.
Source: AQR Capital Management
Trend Following performance relative to S&P 500 moves.
- Extreme Bull Market (+20%): Trend Followers capture some upside (by being Long Stocks).
Result: Positive Returns. - Sideways Market (0%): Trends are weak. Whipsaws occur.
Result: Slight Negative / Flat Returns. - Market Crash (-20%): Trends are strong (Panic selling). Algorithms go Short.
Result: Massive Positive Returns (Crisis Alpha).
What-If Scenario: 2022 Inflation Shock
Comparison: Traditional 60/40 vs. Portfolio with 20% Managed Futures.
| Portfolio Type | Asset Mix | 2022 Return |
|---|---|---|
| Traditional 60/40 | 60% Stocks / 40% Bonds | -17.5% (Both failed) |
| Trend Enhanced | 50% Stock / 30% Bond / 20% Trend | -8.0% (Cushioned) |
Result: The Managed Futures component (up ~25% that year) acted as a powerful ballast, cutting portfolio losses in half.
Visualizing “Crisis Alpha”
| Crisis Event | S&P 500 Return | Managed Futures (SG Trend Index) |
|---|---|---|
| Dotcom Bubble (2000-2002) | -45% | +30% |
| Global Financial Crisis (2008) | -37% | +21% |
| Inflation Shock (2022) | -19% | +27% |
*Data shows the uncorrelated nature of Trend Following. When the world panics (Blue bars down), Trend strategies often deliver their best years (Red bars up).
Execution Protocol
Previously, this strategy was only for hedge funds. Now, liquid ETFs exist.
DBMF (iMGP DBi Managed Futures): Replicates hedge fund positioning. Low fee.
KMLM (KFA Mount Lucas): Pure systematic trend following (heavy on commodities/currencies).
A 1-2% allocation does nothing. To get the diversification benefit, you need meaningful exposure. Institutional research suggests 10% to 20% of the portfolio. Fund this by shaving from both stocks and bonds.
In a raging bull market (like 2019), Managed Futures may stay flat or lose money. You will hate it and want to sell it. Do not sell. That is the premium you pay for protection when the next crash hits.
COACHING DIRECTIVE
- Do This: If you want a “Sleep Well at Night” portfolio that can handle inflation, deflation, and crashes. It is the ultimate diversifier.
- Avoid This: If you chase recent performance. Buying Trend Following after a massive year (like buying in 2023 after 2022) often leads to disappointment. Stick to a strategic allocation.
Frequently Asked Questions
What are Managed Futures?
Managed Futures (Trend Following) are strategies that trade futures contracts across asset classes like commodities, currencies, bonds, and equities. They go Long (buy) if prices are rising or Short (sell) if prices are falling.
Why is it called ‘Crisis Alpha’?
Historically, Managed Futures have delivered their best performance exactly when stock markets crash. This is because market crashes often create strong, persistent trends (downward equities, rising volatility) that these algorithms capture.
Is it risky?
The main risk is ‘Whipsaw’ markets—when prices fluctuate sideways without a clear trend. In these periods, Trend Followers can suffer small, repeated losses. It requires patience to hold through these flat periods.