Economic outlooks for 2025 under a second Trump administration generally fall into two distinct camps. While one set of investors position for runaway inflation, the other side looks to invest for a deflationary crisis. Managed futures strategies have the ability to thrive in either type of environment, making them a notable strategy to include in 2025 portfolios.
Mount Lucas, the subadvisors for the KraneShares Mount Lucas Managed Futures Index Strategy ETF (KMLM ), discussed the trends they’re seeing in investor outlooks on inflation and the economy in a recent paper with KraneShares. Growth and inflation outlooks tend to remain concentrated around the Fed’s inflation target. Though some expect higher or lower inflation, those estimates still remain close to the target.
Regarding the economy, however, views become markedly polarized. “Currently, not a single person thinks the economy is in a state of equilibrium,” the authors noted.
Half of investors expect soaring inflation, driven by ballooning deficits and subsequent declines in confidence in the U.S. dollar. Other anticipated drivers for runaway inflation include pressure from the Federal Reserve and rising commodity costs amidst turmoil globally.
The other half firmly believe the U.S. is headed for an intense period of deflation. Contributors to this scenario include the expected $2 trillion cut to the federal budget and millions of deportations. Unlike the other side, believers in deflation anticipate emerging market disruptions on USD gains, as well as falling commodity prices.
“Adding to this uncertainty, President Trump, the world’s largest one-man volatility machine, has teamed up with perhaps the only person who could rival him, Elon Musk,” said the authors. “Volatility squared.”
Invest for Diverging Economic Expectations With Managed Futures
Whichever outcome, managed futures could prove a boon for investors. Through the ability to go long as well as short, these flexible trend strategies have the ability to position for any economic outcome. In a rising inflation scenario, managed futures can short long duration bonds and the USD compared to other currencies. Should commodity prices rise, they’d position long in gold, crude oil, and other commodities. In a deflationary environment, those positions would likely flip. Managed futures would short commodities like oil and copper on falling demand, and go long the USD and bonds.
“Managed Futures strategies like KMLM provide exposure to shifts in the world that you can’t easily predict or access,” the authors explained. That’s because “many portfolios are long-only and lack the tools to engage in currency and commodity markets.”
KMLM invests in futures contracts in commodities, currencies, and global bond markets. Its benchmark is the KFA MLM Index. The index uses a trend-following methodology and is a modified version of the MLM Index.
The index weighs the three different futures contract types by their relative historical volatility. Within each type of futures contract, the underlying markets are equal dollar-weighted. The index also evaluates the trading signals of markets every day and rebalances on the first day of each month. It 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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