AXS Insights

One Investment Strategy that Skipped the Quarantine

For decades to come, we will likely be talking about how the coronavirus pandemic shut down economic activity, wreaked havoc on financial markets, and introduced a paradigm shift in the workforce. It will become a textbook case study for how an extended bull market plummeted into the fastest market correction on record at the time. Investors lost significant value with equities leading the way by dropping as much as 33.9% in 23 days. Most other investment strategies, even those with low correlations to equities, were also forced down the slide.

Here’s what happened to several distinct alternative categories since the beginning of 2020.

Managed futures performance in early 2020
Managed futures performance in early 2020

The Top Line

What stands out in the performance chart is the bright blue line representing Managed Futures, an alternative investment strategy that has resisted the downturn and maintained value year-to-date. Managed Futures have evidently been working right through the quarantine.

Institutions and individuals invest in managed futures for the category’s distinct characteristics, in particular their diversified exposure and adaptability.

  • Managed futures can offer investors exposure to over 150 diverse futures markets in currencies, commodities, equities, fixed income and interest rates. This extraordinary diversification in part explains its non-correlation (near zero) to other asset classes.
  • Managed futures are also highly adaptable. Depending on the opportunities they identify, managers can go long or short (owning a security in expectation of its value rising vs. owing a security to another party without buying it in expectation of its value decreasing). Many employ systematic models to analyze price and market structure data and make systematic decisions on entering, exiting and sizing positions. These quantitative algorithms have evolved to react dynamically to changing market conditions.

The Bottom Line: Not an Anomaly

Early 2020 has been challenging for many investors, and we are only in the early innings of understanding the full impact of COVID-19 to our economy, the markets and our lives. In our research, we have seen managed futures rise to the occasion in past recessionary periods (read Keeping Nest Eggs Out of the Bear’s Reach for our reflections on this topic). What’s more, over time managed futures have tended to exhibit positive benefits when equity returns are strong and weak, a noteworthy attribute we will explore in our next blog.

Adding managed futures to investor portfolios can complement traditional and alternative allocations, and it offers diversification benefits that may come in handy in times of calm and commotion.

*Sources: Morningstar. US equities are represented by the S&P 500 Index, a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. All other strategies represent the equal weighted average of funds for their respective Morningstar Institutional categories, including Managed Futures, Global Macro, Long/Short Credit, Multistrategy and Long/Short Equity categories.

Past performance is not a guarantee of future results. Investors cannot invest directly in an index. Index returns do not reflect any fees, expenses or sales charges. Returns are based on price only and do not include dividends. This chart is for illustrative purposes only, does not represent the AXS Investments Funds and is not indicative of any actual investments. These returns were the result of certain market factors, and short-term performance may often reflect conditions that are likely not sustainable, and thus such performance may not be repeated in the future.

This information is educational in nature and does not constitute investment advice. These views are subject to change at any time based on market and other conditions and no forecasts can be guaranteed. These views may not be relied upon as investment advice or as an indication of any investment or trading intent. This content should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by AXS Investments or any third-party. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. AXS Investments does not provide tax or legal advice and the information herein should not be considered as such. AXS Investments disclaims any liability arising out of your use of the information contained herein. You should consult your legal or tax professional regarding your specific situation. All investing is subject to risk, including the possible loss of the money you invest. Alternative investments may not be suitable for all investors.

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