As the name implies, managed futures is a futures-based asset class, and while those contracts can and do include futures tied to well-known equity benchmarks, traditional managed futures strategies don’t feature standard equity exposure.
The WisdomTree Managed Futures Strategy (WTMF) is changing that conversation. Last month, WisdomTree began featuring a tactical equity model in the exchange traded fund. Typically, managed futures strategies are embraced as a way of reducing portfolio correlations to traditional asset classes, such as stocks and bonds.
With that in mind, it’s possible that boosting equity exposure with a managed futures strategy can increase its equity correlations. Fortunately, WTMF has avenues for reducing that risk.
“While having a diversified equity basket is likely to lower correlation, we can further reduce the correlation of our equity model by incorporating a long/short model,” note WisdomTree’s Alejandro Saltiel and Matthew Aydemir in a recent report. “In our opinion, shorting equities should be done with caution, as frequent shorting during a prolonged bull run can have punishing consequences. To prevent excessive shorting, we have incorporated a broad macro signal that indicates when to rotate between a long-only strategy and a long/short strategy.”
An Alternative to Old-Guard Futures Strategies
WTMF, which is more than a decade old, employs a quantitative, rules-based strategy and invests in commodities, equities, currencies, and interest rates futures contracts.
Currently, 56.17% of the fund’s weight is allocated to commodities contracts. WTMF may also be a useful way for advisors to gain leverage to the economic recovery while damping inflation, as a combined 39.31% of the fund’s weight is allocated to energy commodities and industrial metals.
Equity futures represent 50.30% (the percentages exceed 100% due to long/short positioning). Usually, WTMF aims for 40% equity exposure. Of relevance to advisors is the prudent approach WTMF takes to short positions.
“The historical frequencies indicate the model has a predominantly long positioning. Notably, the model does not go short very often, although with relatively high conviction as evidenced in the significantly reduced average return during those periods,” note the WisdomTree analysts. “This is consistent with our belief that shorting equities should be done with caution. Based on the model, equity exposure has averaged approximately 75% of the full nominal weight through the entire research period while hedging out tail-risk events.”
WTMF adds another layer of security via its tactical rotation model, which can trim equity exposure as needed and keep correlations in check while capitalizing on short opportunities as they arise. That’s a dynamic advantage relative to old-guard managed futures strategies.
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