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Discussing Managed Futures with Trader Vic and Meb Faber

Last week I spoke with Victor “Trader Vic” Sperandeo, CEO of Alpha Financial Technologies, and Mebane Faber, CIO of Cambria Investment Management. We talked about elements of systematic investment strategies, the prevailing macro landscape and the relevance of employing managed futures in portfolio allocation.

The Mechanics of Managed Futures

Sperandeo described managed futures as a strategy that focuses on volatility and momentum. These include indicators that vary in their look-back lengths—he prefers intermediate trends that last weeks to months. These indicators then create trend-following algorithms that use prices to systematically determine long, flat or short signals. If the trend is above the moving average, it signals a long position, if it's below, it signals a short position. The more complex managed futures strategies also identify how to weight positions in light of volume and relative size and importance considerations.

Market Context for Managed Futures

Sperandeo believes the returns for managed futures are highly correlated to gross domestic product (GDP), inflation (CPI) and interest rates. From 2008 to the present, GDP has compounded at a nominal rate of 1.3% per year; this is the lowest growth rate in an economic recovery. Interest rates have been pegged at zero for this entire period—leaving no returns to be earned on the invested collateral. Furthermore, the CPI has averaged 2.2% since the hyperinflationary times of the 1970s (vs. 4.25% if we were to include the 1970s).1 Sperandeo believes that this macro backdrop presents a challenge for managed futures.

Managed futures typically need volatility and trends to perform well. There has been no recession, but also no robust growth, so this created an environment lacking in volatility that can establish strong trends for managed futures strategies to capitalize on.2

Managed Futures—an Alternative to Buy and Hold

An issue investors have when employing a buy-and-hold equity strategy is the ability to sit through long drawdowns such as those in the 1930s and two distinct periods of 50% drawdowns in the last decade. It is difficult for a lot of people to stomach such returns. Faber believes that trend-following...