Managed Futures Improvements: What We’ve Seen So Far

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By Matthew Aydemir, Tree of Wisdom.

We made significant changes to our WisdomTree Managed Futures Strategy Fund (WTMF) in June, with the goal of improving risk-adjusted performance. Although we are hesitant to draw too many conclusions from short-term results, we can now provide some remarks on what we observed in post-revamp WTMF.

Fund performance (post-recast)

Naturally, the focus has been on the performance of the Fund since changes were made to the model.

This quarter has been relatively slow for the managed futures industry, as evidenced by the recent drop in the SG Trend Index (NEIXCTAT), an equally weighted index of 10 of the top commodities trading advisers ( CTA) that follow trends. Despite a lackluster quarter for the managed futures space, the revamped WTMF retained and added to last year’s gains. The Fund also outperformed the benchmark at NAV while exhibiting lower volatility. The comparison is best illustrated in the figure below.

Figure 1: Performance of the WTMF vs SG index

Standardized performance for WTMF is available here.

Another useful point of comparison is the previous WTMF model. In the figure below, we show the old model reconstructed compared to the live model. While the rebuild isn’t a perfect replica of the performance of the old Fund, it gives us a reasonable idea of ​​what we could expect from the old model over the past few months.

Figure 2: Fund return compared to the old model approximation (post-reorganizations)

For definitions of terms in the table, please see the glossary.

As we have mentioned in previous blog posts, one of the additions to the Fund was a tactical equity model. Although this is only a few months of history, the strong performance of equities during this period boosted the performance of the Fund. The tactical equity model also reduced the volatility of the Fund during periods of falling commodities.

The main takeaway here is that the shifts had a positive impact on both yield and volatility in the last quarter.

Current positioning

The September rebalancing (effective 9/21/21) saw a shift from net long exposure to short exposure on energy, particularly oil. Despite this, the Fund remains net long on commodities.

Rates remain low, resulting in a net long position on our rate contracts. The currency pattern has been USD long for the past two months and remains long this month. After a strong performance in August, the tactical equity component increased exposure from 32% to the full nominal weighting of 40%. The Fund’s positioning for September 2021 is summarized in the following table.

For a current list of funds, click here.

Integration of Managed Futures in a portfolio

One of the main uses of managed futures is for diversification. A more traditional approach has been to incorporate a fixed income component. But in a low interest rate environment, the contribution of a bond component is limited.

In addition, given the low rates, it is questionable to what extent a bond component will be able to hedge equity declines in the future. Incorporating managed futures into a portfolio can further diversify a portfolio’s risk factors by providing long / short exposures to a variety of asset classes. WTMF invests in a wide range of uncorrelated assets spanning stocks, commodities, currencies and rates, making it an excellent candidate for portfolio diversification.

In our previous blog post, we described the benefits of combining managed futures with our effective core fund. The result is a capital efficient portfolio with a strong risk-adjusted return profile. Given the strong performance of WTMF’s post-reorganizations, it may make even more sense to build a capital efficient portfolio in this way. It is probably still too early to draw too many conclusions from the data, but it will be exciting to see how the fund’s performance evolves over the year.

Originally posted by WisdomTree on September 17, 2021.


Significant risks associated with this article

WisdomTree shares are bought and sold at market price (not net asset value) and are not individually redeemed by the Fund. Total returns are calculated on the basis of the daily net asset value (NAV) at 4:00 p.m. Market price returns reflect the midpoint of the bid / ask spread at the close of trading on the exchange where the Fund’s shares are listed. Market price returns do not represent the returns you would receive if you were trading stocks at other times.

There are risks associated with investing, including possible loss of capital. An investment in this Fund is speculative, involves a substantial degree of risk and should not constitute the entire portfolio of an investor. One of the risks associated with the Fund is the complexity of the various factors that contribute to the performance of the Fund, as well as its correlation (or non-correlation) with other asset classes. These factors include the use of long and short positions in commodity futures, forward currency contracts, swaps and other derivatives. Derivatives can be volatile and may be less liquid than other securities and more sensitive to the effects of various economic conditions. The Fund should not be used as a proxy to take long positions only (or only short) in commodities or currencies. The Fund could lose significant value during periods when long only indices rise or short only indices fall. The Fund’s investment objective is based on historical price trends. There can be no assurance that these trends will be reflected in future market movements. The Fund generally does not make intra-monthly adjustments and is therefore subject to substantial losses if the market moves relative to the Fund’s established positions on an intra-monthly basis. In markets without sustained price trends or in markets that reverse rapidly or “crash”, the Fund may experience significant losses. As the Fund is actively managed, the ability of the Fund to achieve its objectives will depend on the efficiency of the portfolio manager. Due to the investment strategy of this Fund, it may make higher capital gains distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

Learn more at ETFtrends.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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