Academic Research Concludes Managed Futures Investments Enhance Performance of Stock and Bond Portfolios.

WASHINGTON, D.C.--(BUSINESS WIRE)--Nov. 4, 1998--Managed futures investments make both good stand-alone investments and good portfolio assets according to a study underwritten by the Foundation for Managed Derivatives Research.

The new research represents the most comprehensive examination of the industry to date, analyzing more years of data and more commodity trading advisors (CTAs) than ever before.

A key finding of the research reveals that including managed futures in a diversified stock and bond portfolio improves the Sharpe ratio, a measure of risk-adjusted returns, significantly. In fact, the study shows that Sharpe ratios increased by 22.7 to 45.4 percent when managed futures investments were added to stocks and bonds.

The research report, titled "Managed Futures As An Asset Class," was collaborated on by Franklin R. Edwards and Jimmy Liew of the Graduate School of Business, Columbia University, according to Richard E. Oberuc, president of the Foundation for Managed Derivatives Research. Their work examines the performance of managed futures investments during the years 1982-96, both as stand-alone investments and as assets in diversified stock and bond portfolios. The data encompass 1,150 CTAs, 439 private commodity pools and 619 public futures funds for a total of 119,481 months. Performance data consists of monthly returns net of all fees. The data are provided by Managed Account Reports (MAR).

The managed futures industry encompasses CTAs, private commodity (futures) pools and public commodity (futures) funds. By year-end 1996 almost $30 billion was invested in the managed futures industry. Nine stylized managed futures investments were analyzed as follows: randomly-selected single-CTAs, pools and funds; equally-weighted market portfolios of CTAs, pools and funds; and value-weighted market portfolios of CTAs, pools and funds. Two subperiods, 1982-88 and 1989-96, also were examined. Based on Sharpe ratio analysis, in all time periods analyzed, either equally-weighted portfolios of CTAs or value-weighted portfolios of pools received the highest ranking of the nine alternative asset classes.

Significantly, five out of the nine managed futures investment styles examined either outperformed or matched the S&P 500, which returned 16.7 percent for the period 1982-88. During the same period, randomly-selected CTAs returned 23.2 percent, randomly-selected private pools returned 18.4 percent, equally-weighted CTAs returned 23.1 percent, equally-weighted private pools returned 18.4 percent, and value-weighted private pools matched the S&P 500 at 16.7 percent. Four styles that underperformed large caps include randomly-selected public funds, up 9.8 percent, equally-weighted public funds, up 9.9 percent, value-weighted CTAs, up 13.8 percent and value-weighted public funds, up 8.6 percent.

Additional research findings include:

-- An unconstrained optimal portfolio for the sub-period 1989-96

included 39 to 48 percent allocations to CTA and pool investments.

-- While CTA and pool returns have been significantly lower in the

1990s than in the 1980s, those investments continued to provide

attractive risk-adjusted returns because of lower returns

volatility and low correlation with other financial assets.

-- The performance of value-weighted pools stands out as an attractive

stand-alone investment as compared with both non-futures

investments and other managed futures vehicles, especially during

the 1989-96 period. This is particularly impressive given the

extraordinarily high common stock returns.

-- Private pool managers generate higher returns and higher Sharpe

ratios than most non-futures investments, and they outperform

other managed futures returns.

The Foundation for Managed Derivatives Research provides grants for economic, business and financial research that examines, on a scholarly basis, the use of derivative instruments as an investment vehicle. Derivative instruments may include futures contracts, options on futures contracts, forward contracts, and swaps. The growth of these markets has led to increasing involvement by institutions and individuals for investment purposes. As a result, there is demand for academic research considering the advantages and disadvantages of including managed derivatives in investment portfolios. Grants are available to universities, colleges, academic foundations, academic institutions, individuals, and research entities. The Foundation was founded by Managed Funds Association (MFA) in 1994.

MFA is the association for investment professionals in futures, hedge funds and other alternative investments. MFA has over 700 members and, since its inception in 1991, has provided industry leadership in government relations, communications and public relations. The objective of MFA is to enhance the image and understanding of the industry, to further constructive dialogue with the regulators in pursuit of regulatory reform and to improve the communications with, and training of, its members through effective conferences and communications programs.