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Markets continue to grapple with inflation as investors attempt to price in how aggressively the Fed will raise interest rates next month, experiencing a sharp sell-off in both stocks and bonds on Thursday as well as the 10-year Treasury rising above 2% for the first time since 2019, reports CNBC.
James Bullard, the St. Louis Fed President, has called for a 1% interest rate increase by July, but other members of the Fed think that even a 50 basis point increase in March would be too aggressive.
“While the time has come (or did months ago) to move policy persistently and aggressively away from overly accommodative conditions, and toward a more neutral and appropriate stance, executing on this pivot is going to be a real challenge for policymakers,” said Rick Rieder, BlackRock’s CIO of global fixed income, in a note.
The uncertainty felt by advisors and investors is being reflected market-wide, with advisors assessing their portfolios and beginning to search for income and performance through alternative allocations.
Managed futures could be one solution due to their potential to add diversification and decreased volatility within traditional portfolios. They provide a potential hedge on risk within equities, bonds, and commodities and are classed as an alternative investment.
Mount Lucas Management was the first to create a price-based index on futures returns that utilizes a trend-following algorithm to simulate investor behavior and involvement in futures markets.
The KFA MLM Index seeks to offer moderate returns during low volatility times in markets by being cost-efficient with fees and low turnover and leaning on the returns from equity assets. During rapid movement and volatility by markets, the algorithm seeks to continue returns without pinpointing market fluctuation points or reducing exposures.
Investing in Managed Futures With KMLM
The KFA Mount Lucas Index Strategy ETF (KMLM) from KFAFunds, a KraneShares company, offers investment with managed futures.
KMLM’s benchmark is the KFA MLM Index, and the fund invests in commodity currency as well as global fixed income futures contracts. The underlying index uses a trend-following methodology and is a modified version of the MLM Index, which measures a portfolio containing currency, commodity, and global fixed income futures.
The index weights the three different futures contracts types by their relative historical volatility, and within each type of futures contract, the underlying markets are equal dollar-weighted. Futures contracts will be rolled forward on a market-by-market basis as they near expiration.
The index evaluates the trading signals of markets every day, rebalances on the first day of each month, invests in securities with maturities of up to 12 months, and expects to invest in ETFs to gain exposure to debt instruments.
KMLM carries an expense ratio of 0.90%.
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