In early 2019, J.P. Morgan surveyed hedge fund investors to identify their reasons for investing in this space – 88% of respondents cited “alpha generation” as one of the top three motivations. If this is the case for such a high number of investors, it’s important to look at the strategies being pursued in the quest for alpha to see what’s working and what isn’t. We crunched the numbers and found that it’s a good time for a gut check.
One of the most obvious areas of concern is in Managed Futures. PivotalPath’s Managed Futures Index [“Managed Futures”], which represents performance of 82 institutional-quality managed futures funds, representing over $100B in capital, was up 4.1% in March. The top quartile of managers, ranked by performance, delivered a whopping 9% return for the month. When we evaluate Managed Futures performance over the last 12 months, we see the strategy generated returns of 2.3%, which ranks toward the top of a broad set of hedge fund strategies.
But given the importance of “alpha generation” cited by investors, we did some analysis on alpha relative to the S&P 500 and to PivotalPath’s Managed Futures Strategy Risk Model.* Looking at this way, the numbers are a bit different.
Over the last year, alpha generation relative to the S&P 500 and the PivotalPath Managed Futures Risk Model, has averaged approximately -6% respectively. As you can see, alpha relative to the S&P 500 places the Managed Futures last compared to a broad set of PivotalPath Hedge Fund Indices.
Even more significantly, the strategy ranks 39/39 – or dead last – when comparing alpha generation among each of the 39 hedge fund sub-strategies covered by PivotalPath.
Providing further context over a longer time period, the PivotalPath Managed Futures Index has averaged negative alpha of ~3% relative to both indices since April of 2016. And it hasn’t generated significant alpha to either index since it’s outsized performance in 2014.
So, will we see an uptick in investor interest in Managed Futures funds? It’s hard to say since manager selection, as always, is crucial. We evaluate many funds in this strategy on behalf of PivotalPath’s institutional client base. Systematically assessing alpha relative to meaningful benchmarks is a core component of the firm’s research process, represented in a fund’s Alpha Score according to the PivotalRating System.
*PivotalPath Managed Futures strategy risk model consists of Barclays High Yield Credit Bond Index, Dow Jones Commodity Index, MSCI Emerging Markets Index, U.S. Dollar Index and the S&P 500 Index (TR)
**Alpha calculation uses 1- month look back