Indexing Managed Futures Strategies

 This article is reprinted from the Indexology blog of S&P Dow Jones Indices.

Managed futures strategies generally tend to be trend following, which means that when an individual asset shows a clear price uptrend (or downtrend), the strategy will hold a long (or short) position in the asset. The strategies use a wide variety of quantitative models that utilize highly liquid, regulated, exchange-traded financial derivatives across equity, fixed income, foreign exchange, and commodity markets.

Traditionally, managed futures strategies have been utilized by investors as a complement or alternative to active or less-liquid alternative strategies. Such strategies have been touted by investors for their ability to offer liquidity and capital preservation during periods of broad equity market malaise.

Managed futures strategies have a unique profile relative to traditional investment strategies, including:

• Long-term positive historical returns, achieved with unlevered risk levels that are on average one-half that of equities;
• Low and sometimes negative correlations to equities and other asset classes; and
• Strong historical performance during equity bear markets.

Managed futures strategies are well suited to indexing, given that they are based on transparent, rules-based quantitative models. S&P Dow Jones Indices offers three headline managed futures indices. All three reflect the price momentum of futures contracts across different asset classes.

• The S&P Strategic Futures Index (SFI) reflects the price momentum of 24 futures contracts on physical commodities, interest rates, and currencies. The index uses an enhanced rolling schedule for long commodities and applies a risk parity weighting scheme by sector.
• The S&P Dynamic Futures Index (DFI) reflects the price momentum of 24 futures contracts on physical commodities, interest rates, and currencies. It applies an equal weighting scheme between commodities and financials, and individual commodities weights are based on the S&P GSCI Light Energy.

The S&P Systematic Global Macro Index (SGMI) reflects the price momentum of 37 constituent futures contracts, covering equities, commodities, interest rates, and currencies. Each sector contributes equally to index risk, and each constituent contributes equally to the risk of the sector in order to hit a target volatility. Leverage is used to help achieve the volatility target.

In a subsequent post, we will examine the recent performance of these indices in light of the current market conditions and identify the benefits of passive managed futures strategies.