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    GSAM Connect

    MANAGING RISK WITH MANAGED FUTURES

    February 08, 2023 | 5.5 Minute Read

    Timothy P. Ramsey, CFA

    Equity Strategist, Public Capital Markets

    Timothy P. Ramsey, CFA

    A specter is haunting the financial markets—the specter of volatility. For equity investors especially, there are reasons to believe the next decade may look very different from the previous one, wherein extremely accommodative monetary policy from the Federal Reserve helped fuel a seemingly inexorable rise in equity prices, seemingly in a straight line. We are still constructive on equities, believing they offer the best defense against the erosion of purchasing power in an era of rising costs of living. But it may be wise to temper expectations. Not only do we expect forward returns for the S&P 500 to mark a step down from recent history, stocks may exhibit more volatility going forward as investors grapple with multiple headwinds, including stickier inflation, supply chain realignment, geopolitical tension, deglobalization and energy insecurity.

     

    A Managed Futures—also commonly known as Trend-Following—strategy may offer some shelter from ongoing market gyrations. No two Managed Futures strategies are the same; but they tend to have some strong commonalities. A Managed Futures strategy will typically employ long and short positions in multiple markets (e.g., Equities, Rates, Credit, FX, Commodities) based on price trends, or momentum. For each market, price momentum may be measured over multiple time frames, intended to both capture long-term trends but also react quickly to sentiment reversals. Tactical views are generally implemented via Equity/Bond/Rate Futures, Forex Forwards, and Credit Default Swaps. A special characteristic of systematic Trend-Following strategies is their speed—how quickly they can respond to changing market dynamics—especially relative to asset allocation models informed by human bias.

     

    Trend-Following strategies have historically provided a diversifying pattern of returns that behave differently than most traditional asset classes, and even other alternative investment strategies: In fact, Trend-Following strategy (considering the Credit Suisse Managed Futures Liquid TR Index as proxy) returns most often evidence negative correlations versus those for Core and Satellite asset classes (see table below).

     

     

    Exhibit 1: 3-Year Correlations—Credit Suisse Mgd Futures TR Index vs. Select Core and Satellite Asset Classes

     

    Source: MSCI, Morningstar Direct, and Goldman Sachs Asset Management as of December 31, 2022. “Core Assets”: US All Cap Equities, Developed Int’l Equities, US Aggregate. “Satellite Assets”: Broad Tactical EMD, Public Credit, Emerging Markets Equity, Global ex-US Developed Small Cap, Global Public Real Estate, Global Infrastructure, US Municipal High Yield. Correlation: a statistical measure of the strength of a linear relationship between two variables. Past correlations are not indicative of future correlations, which may vary. Proxy Benchmarks for Asset Classes: US Large Cap Equity=S&P 500 TR USD. US AGG Fixed Income=Bloomberg US Agg Bond TR USD. EAFE Equity=MSCI EAFE GR USD. EM Equity=MSCI EM GR USD. Global HY Fixed Income=Bloomberg Global High Yield TR USD. Public Real Estate=FTSE Nareit Composite TR. Global Infrastructure=S&P Global Infrastructure TR USD. Multi-Strategy Liquid Alts=Wilshire Liquid Alternative TR USD. Past performance does not predict future returns and does not guarantee future results, which may vary. Diversification does not protect an investor from market risk and does not ensure a profit.

     

     

    A 15% allocation to Liquid Alternatives within an otherwise 60:40 portfolio is both modest and meaningful. An allocation to Managed Futures at this level has historically yielded certain key benefits:

     

    Crisis Management

    One objective for any Managed Futures strategy may be to seek to blunt risk in extreme adverse markets, when short positions may enable the strategy to profit from declines (see graphic below, left). A 15% allocation to Credit Suisse Mgd Futures TR Index in a Classic 60-40 portfolio may have blunted the Maximum Drawdown experienced in YTD 2022 (see graphic below, right).

     

     

    Exhibit 2: Managed Futures in Action

     

    Source: Morningstar Direct, as of December 31, 2022. “60-40 with 15% Managed Futures” = 50% S&P 500 TR USD Index + 35% Bloomberg US Aggregate Bond TR USD Index + 15% Credit Suisse Mgd Futures Liquid TR USD. “Classic 60-40” = 60% S&P 500 TR USD Index + 40% Bloomberg US Aggregate Bond TR USD Index. Maximum Drawdown: The peak (highest value) to trough (lowest value) decline during a specific record period of an investment or fund. Past performance does not predict future returns and does not guarantee future results, which may vary. The above illustration does not reflect performance of any Goldman Sachs Asset Management product and is being shown for educational and informational purposes only.

     

    Risk-Reward Enhancement

    Another function of Managed Futures strategies can be to seek to help smooth overall portfolio volatility—and improve investor experience—over extended time frames. Owing to its exceedingly low/negative correlations with most broad asset classes, Credit Suisse Mgd Futures TR Index is a powerful diversifier, even at a modest 15% allocation within a portfolio. Since Inception of the Credit Suisse Mgd Futures Index (February 2011), a 60-40 portfolio that includes a Managed Futures allocation may be more likely to improve risk-adjusted performance relative to a Classic 60-40 the longer one extends the investment horizon.

     

     

    Exhibit 3: 60-40 with 15% Managed Futures: Frequency of Risk-Adjusted Outperformance vs Classic 60-40: Since Common Inception (February 1, 2011)

     

    Source: Morningstar Direct, as of November 30, 2022. “60-40 with 15% Managed Futures”= 50% S&P 500 TR USD Index + 35% Bloomberg US Aggregate Bond TR USD Index + 15% Credit Suisse Mgd Futures Liquid TR USD. “60-40” = 60% S&P 500 TR USD Index + 40% Bloomberg US Aggregate Bond TR USD Index. Graph represent frequency of risk-adjusted outperformance of a 60-40 with 15% Managed Future relative to a Classic 60-40. Past performance does not predict future returns and does not guarantee future results, which may vary. The above illustration does not reflect performance of any Goldman Sachs Asset Management product and is being shown for educational and informational purposes only.

     

    Investor experience counts: over the last 5-years—across highly varied market terrain—a 60-40 portfolio that includes Managed Futures may have delivered competitive absolute performance (5.9% annualized, vs. 6.1% for a Classic 60-40) with lower volatility (9.9% annualized, vs. 12.1%). It captured less downside than the Classic portfolio, with a lower Maximum Drawdown in 2022. A smoother glide path may be more likely to keep investors engaged with their investment programs to the potential benefit of their long-term financial objective.

     

     

     

     

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    Disclosures

    THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

    Neither MSCI nor any other party involved in or related to compiling, computing, or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability, or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

    This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.

    The views expressed herein are as of February 3, 2023 and subject to change in the future. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.

    Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, they should not be construed as investment advice.

    Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.

    Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.

    Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

    Glossary

    Standard Deviation is a statistical measure of volatility indicates the “risk” associated with a return series.

    Drawdown: The peak (highest value) to trough (lowest value) decline during a specific record period of an investment or fund.

    Correlation: a statistical measure of the strength of a linear relationship between two variables.

    The S&P 500 Index is the Standard & Poor’s 500 Composite Stock Prices Index of 500 stocks, an unmanaged index of common stock prices.

    The Bloomberg US Agg Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

    The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.

    The MSCI EM Index captures large and mid cap representation across 24 Emerging Markets (EM) countries. With 1,386 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

    The Bloomberg Global High Yield Index is a multi-currency flagship measure of the global high yield debt market.

    The FTSE Nareit Composite Index is a free-float adjusted, market capitalization-weighted index of U.S. Equity and Mortgage REITs.

    The S&P Global Infrastructure Index is designed to track 75 companies from around the world chosen to represent the listed infrastructure industry while maintaining liquidity and tradability.

    The Wilshire Liquid Alternative Index measures the performance of a focused basket of mutual funds that provides risk adjusted exposure to equity hedge, global macro, relative value, and event driven alternative investment strategies.

    Indices are unmanaged. The figures for the index reflect the reinvestment of all income or dividends, as applicable, but do not reflect the deduction of any fees or expenses which would reduce returns. Investors cannot invest directly in indices.

    The indices referenced herein have been selected because they are well known, easily recognized by investors, and reflect those indices that the Investment Manager believes, in part based on industry practice, provide a suitable benchmark against which to evaluate the investment or broader market described herein.

    Confidentiality

    No part of this material may, without Goldman Sachs Asset Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

    Date of First Use: February 08, 2023. 304880-OTU-1742450.

    © 2023 Goldman Sachs. All rights reserved.

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