futures

Are Managed Futures Funds Worth Including In Your Portfolio?

Scott BuchananLeave a comment

Back in February, 2023 I wrote an enthusiastic plug for including managed futures funds in an investment portfolio. That was based on several observations. First, bonds have become often positively correlated with stocks, so the traditional 60/40 stock/bond portfolio provides less hedging or diversification than earlier. Second, during the long grinding bear market of Jan-Oct 2022, managed futures funds shot up, nicely hedging stocks. Third, I had only recently discovered managed futures, so they were for me a shiny new toy.

Managed futures funds hold both long and short positions in futures contracts for a variety of commodities (e.g., oil, gas, metals, cattle), stocks (e.g., domestic vs. international) and other financial instruments (domestic and foreign bonds, currencies, interest rates, etc.). Fund managers usually base their positioning on momentum or trend-following. Historical data shows that if a commodity moves up steadily for, say, a month, there is greater than 50% odds that it will continue moving up for some additional time.  If the fund’s positioning is correct, it makes money the next week or month. If it is incorrect, the fund loses money.

Historically, a good managed futures fund will trade fairly flat or slightly up during a stock bull phase, then step up to give positive return during a stock bear market, to counter the drop in equities prices. We can see below how that worked for managed future (MF) ETF KMLM around 2022. It rose slowly in 2021, then fell back at the end of the year. However, in Jan-Oct 2022 while stocks (and bonds) were painfully grinding down to a 22% loss, KMLM ripped higher by a huge 40%. That seems like a great hedge:

KMLM quickly gave back those gains, for reasons we will discuss. But if you had been consistently rebalancing your portfolio, you would have captured much of those gains.

This sort of performance is why some advisors recommend moving much of your non-stock holdings out of bonds and into managed futures. What’s not to like here?

It turns out that MF funds struggle if there are not fairly long, strong trends in commodity prices. If trends reverse quickly, and then reverse again, then the fund’s positions will lose money over and over. We can see this in the above plot. The story for most of 2022 was interest rates going up and up and up. MF funds were rock stars as they rode that trend for many months. But there was a surprising break in futures trends in November, 2022, as markets suddenly started pricing in an early Fed pivot towards easing in 2023, and so interest rates rose, and bonds and the U.S. dollar tumbled. All the managed futures funds took a sharp hit Nov-Dec 2022. KMLM then went roughly flat for 2023; other MF funds fared worse.

So far, so good. However, it seems like there has been a sea change in futures markets. Before around 2010 or so, there is reason to believe that much of the futures price action was driven by the underlying commodities themselves. For instance, cattle or soybean producers wanted to protect themselves against changes in cattle or soy prices, and so they would buy or sell futures to lock in prices say eight months out. In these situations, there would naturally and normally be months-long trends in futures prices. Wall Street took the other side of those trades. But now it seems to me (can’t give proof reference) that it’s speculators on both sides of the trades, leading to trade algos constantly trying to outguess each other and higher volatility.

For whatever reason, normal trend-following MF has been a bad business for the past 2 years. Here is a continuation of the chart above, showing mid Aug 2023- mid Aug 2025 for KMLM (orange line) compared to S&P 500 stocks (blue line):

The scale is not shown here, but KMLM lost some 30% of its value during that time period. That is NOT the kind of hedge you want to hold.

So, should we forget about MF funds? It turns out that not all MF funds perform the same. My informal research suggests that most MF funds have performed similar to KMLM in the past two years (=abysmally). Since my 2023 article, though, (a) an improved MF ETF (CTA) has appeared, and (b) I became aware of a superior MF fund (AQMNX) of the old-style (non-ETF) mutual fund format. Below is a 3-year chart of KMLM, SP500, and the ETF CTA and the mutual fund AQMNX:

We can see that both the new contenders are up instead of down in the past three years, and both were uncorrelated enough to SP500 to cushion the big Feb-April stock drawdown this year. They handily outperformed bonds (e.g. BND, not shown) during this time period.

There are fundamental reasons why those two funds would behave differently than plain vanilla trend-following KMLM. CTA adds a factor called carry (which I will not try to define) to its algo, and also takes large concentrated bets. AQMNX draws on the very sophisticated quantitative resources of the AQM fund family. It also takes long/short bets on equities (e.g. S&P 500 index), which are not in KMLM.  AQMNX is not available through all brokerages (it is at Fidelity).

As the months roll by and plain stocks soar effortlessly up and up, it may seem pointless to consider any portfolio hedges. But for those who value diversification, these two funds may merit consider consideration. (As usual, nothing here should be considered advice to buy or sell any security).

Learnings From Trading Short Volatility Funds, 1. The Tantalizing Promise of Quick Riches

Scott Buchanan1 Comment

The VIX is a calculated measure of stock market volatility, based on the prices of stock options. It spikes up when there is a market upset, then seemingly always settles back down again after a few days or weeks. So, it seems simple to make a quick profit from this behavior: short the VIX when it spikes, and then close your trade when it comes back down. What could possibly go wrong?

VIX Index, May 2024-April 2025. From Seeking Alpha.

It’s a bit more nuanced than that, since you can’t directly buy or sell the VIX. It is just a calculated number, not a “thing.” However, there is a market for VIX futures. The value of these futures is based on expectations for what VIX will be on some specific date. The values of these futures go up and down as the VIX goes up and down, though there is not an exact 1:1 relationship. There are funds that short VIX futures, which are a proxy for shorting the VIX futures yourself.  So, the individual investor could buy them after the VIX spikes (which would drive down the short VIX fund price), then sell them when VIX declines (and the short VIX fund goes back up).

The chart below shows the VIX (% change, orange curve) in the past twelve months prior to May 1.   There were three episodes (Aug 2024, Dec 2024, Apr 2025) where VIX spiked up. These episodes are marked with green arrows. As expected, when VIX spikes up, the short volatility fund SVIX (purple line) drops down. In August and December, if you were clever enough to buy SVIX at its low, you could turn around and sell in a week later for a good profit. The movements of SVIX are dwarfed this plot by the gyrations of VIX in this chart, but a couple of short red horizontal lines are drawn at the bottoming values for SVIX, to show the subsequent rise. A 3x leveraged S&P 500 fund, UPRO, is shown in blue.

There are important nuances with these funds. One is that a long or short VIX futures fund, at the end of the trading day, must buy and sell some futures shares to meet their performance mandate. As of say May 1, the -1X VIX fund SVIX was short 14,311 May VIX futures contracts (expiring 5/20/2025), and short 10,222 June futures (exp. 6/17/2025). To keep its exposure centered at on one month out from the present date, the fund must buy back some near month (here, May) contracts each day, and short some additional next month (June), at the close of every trading day. If the market value of the near month VIX futures contract is lower than the next month contract (being in “contango”), as it generally is during periods of low volatility, this rolling process makes money every day, to the tune of maybe 5% per month. That compounds big time over time, to over a 60% gain in twelve months. That’s the good side. The VIXcentral site shows current and historical VIX futures prices for the next several months out.

A bad side of these short funds is that the day-to-day inverse movements can rachet the fund value down and down, as VIX goes up and down. So even if the VIX ends up in six months at the same value as it is today, it is possible for a short VIX fund to be lower or higher. This can lead to a more or less permanent step down in fund value. Also, in volatile times, the near futures price is higher than the next month out, and so the daily roll works against you.

There is a term that trading pros use for amateurs who jump into volatility funds without really knowing what they are doing: “volatility tourists”. These hapless investors sometimes hear of big profits that have been made recently in vol, and then buy in, often at what turns out to be the wrong time. Then market storms arise, things don’t go the way they expected, and they get shipwrecked.

Such was the case in 2018. SVXY at that time was a fund that moved inversely to volatility futures, on a -1X daily basis. This short vol trade made insane profits in 2H 2016 and in 2017, far outpacing stocks. Someone who bought into SVXY at the start of 2017 would have quintupled their money by the end of the year. (See chart below, orange line).

However, February 5, 2018 is a day that will live in volatility infamy. Because of the roaring success of short VIX in the previous two years, investors had piled into short VIX ETFs. The VIX suddenly doubled that day, and the short vol funds could not do the daily futures trades they needed, and so their value was decimated. This event is known as Volmageddon. The chart below shows the rise (and fall) of the -1X VIX fund SVXY in orange, compared to a stodgy S&P 500 fund SPY (in green).

Folks who bought SVXY looked like geniuses, until Feb 5. Then they lost it all, more or less. The tourists licked their wounds and moved on, and short vol went clean out of fashion for a while. One short VIX fund, XIV, actually an exchange traded note (ETN), went to zero and closed. SVXY itself lost over 90% of its value. After this near-death experience in 2018, SVXY contritely modified its charter from being -1X VIX futures to being -0.5X. That reduces its exposure to vol shocks. That modification served it well in March, 2020 when the world shut down and VIX shot to the moon and stayed there for some time. SVXY lost something like 70% of its value then, but it lived to trade another day, and slowly clawed its way back.

However, short vol has made a comeback in recent years. The -0.5X SVXY was joined in mid-2022 with a new -1X VIX fund, SVIX (for investors who don’t remember what happened to -1X funds in 2018! ). Short vol actually had a very good run in 2022, 2023, and first half of 2024:

The chart above shows SVIX ( -1X, purple) and SVXY (-0.5X, blue), along with the S&P500 (stodgy orange line) over the past three years. The two inverse vol funds totally smoked the S&P through July, 2024. Investors in SVIX were up over 300%, compared to 35% in stocks. Even the more conservative vol fund SVXY was up 165%. Yee-haw!

The volatility tourists poured in, and then came August 5, 2024, with a short, sharp, unexpected spike in volatility. As we noted earlier, it was not so much that stocks cratered, but there was a hiccup in the global financial system, mainly around unwinding of the yen carry trade. The values of the short vol funds got decimated. Then the recent brouhaha over tariffs in April 2025 whacked them again. This drove the value of SVIX below the three-year rise in stocks, although SVXY still outpaces stocks (57% vs 35% rise).

There were dips in SVIX and SVXY in March 2023 (Silicon Valley Bank blowup), October 2023 (Yom Kippur attacks on Israel by Hamas), and April, 2024, corresponding to spikes in VIX. In those cases, it worked great to buy the dip, since within a few months SVIX and SVXY churned to new highs. Many were the articles in the investing world on the wonderful virtues of the daily VIX futures roll. But then August 2024 and April 2025 hit, where there was no complete, rapid recovery from the huge price drops.

What to take away from all this? What comes to my mind are well-worn truisms like:

If it looks too good to be true, it’s probably not true; There is no free lunch on Wall Street; It’s not different this time.

The reason I know this much about these trading products is that I got sucked in a bit by the lure of monster returns. Fortunately, I kept my positions small, and backstopped some trades by using options, so all in all I have probably roughly broken even. That is not great, considering how much attention and nail-biting I have put into short vol trading in the past twelve months.

In an upcoming post, I will report on an alternative way to trade volatility spikes, which has worked out much better.

Disclaimer: Nothing here should be considered advice to buy or sell any security.

How to (Almost) Double Your Investing Returns 3. “Stacked” Multi-Asset Funds

Scott Buchanan2 Comments

Two weeks ago we described a simple way to achieve roughly double investing returns on some asset class like an S&P 500 stock basket, or on some commodity like gold or oil, by buying shares in an exchange-traded fund (ETF) whose price moves up or down each day two times as much as the price of the underlying stocks or commodities. For instance, if the S&P 500 stocks go up (or down) by 2% on a given day, the price of the SSO ETF will move up (or down) by 4%.  And last week we noted that buying deep in the money call options can also result in an investment which can move up or down by twice the percentage of the underlying stock. These call options side-step the volatility drag implicit in the 2X funds, but require some housekeeping on the investors part to roll them over once or twice a year.

Today we present a third approach for multiplying the return on your investment dollars. This is to buy shares of a fund which holds two different asset classes, in a leveraged form. As an example: if you buy $100 worth of the fund PSLDX, you are buying the equivalent of $100 worth of S&P 500 stocks PLUS about $100 worth of long-dated US Treasury bonds. (PSLDX happens to be an old-fashioned mutual fund, not an ETF, but no matter). It works like this: The fund takes your $100 and buys a bucket of bonds. It then uses those bonds as collateral, and uses futures to get around $100 worth of exposure to the price movements of the S&P 500 stocks. There is not quite a free lunch here, since there is a “carry” cost on the futures, which is about equal to the LIBOR/SOFR short term interest rates (currently ~ 5%).

PSLDX does not promise exactly 100/100  stock/bond exposure, but it comes out pretty close much of the time. A similar product is NTSX which is leveraged x1.5. It gives 90/60 stocks/mixed-term bonds. NTSX has outperformed PLSDX in recent years, since the price of long-term (10-20 year) bonds has been crushed due to the rise in interest rates. RSSB is a recent entry into this space, offering 100/100 exposure to global stocks/laddered Treasuries.

Another reason these leveraged stock/bond products have done relatively poorly in the past two years is that the cost of leverage is actually higher than the bond coupons, due to the inverted yield curve.  This problem will go away if the Fed lowers short-term rates back down to near zero, as they were prior to 2022, but lingering inflation makes that prospect unlikely.

That said, if I have $200 to invest and want $100 stock and $100 bond coverage, I can put $100 into one of these 100/100 funds, and still have $100 left to collect interest on or to invest in some other, hopefully higher-yielding venue. So, these stock/bond funds have their place.

Where this so-called asset stacking shines even more is combining stocks or bonds with something like managed futures. Managed futures are an excellent diversifier for equities (see here). Moreover, since managed futures are typically held in both long and short positions, there will be less financing (carry) cost associated with them. When both stocks and bonds cratered in 2022, managed futures went up. Thus, funds like BLNDX (50 global stocks/100 managed futures) and MAFIX (stocks plus managed futures) went up in 2022, and then continued to rise as stocks recovered. Thus, the returns for these two funds have been steadier and higher than plain stocks (SP 500) over the past three years:

Total returns for past three years, for BLNDX (50 stocks/100 managed futures), SP500 stocks, BND broad US bonds, and MAFIX stacked multi-asset.

BLNDX and its sister fund REMIX are readily available at most brokerages (I hold some), while MAFIX may have daunting minimum investment requirements. RSST is a recent 100/100 stock/managed futures ETF that is easily invested in, and seems to be performing well.

Disclaimer: As usual, nothing here should be considered advice to buy or sell any investment.

Potent Portfolio Diversifier: Managed Futures Funds Go Up When Both Stocks and Bonds Go Down

Scott Buchanan3 Comments

This post is to share some observations that may be helpful to readers who, like me, were rudely surprised by the simultaneous steep decline in both bonds and stocks in the past year.

Bonds and Stocks Are No Longer Inversely Correlated

Back in the day before routine, massive Federal Reserve interventions, say before the 2008 Great Recession, there was a more or less routine business cycle. In an expansionary phase, GDP would increase, there was greater demand for loans, company profits would rise and so would stock prices and interest rates. When interest rates go up, bond prices go down. When the cycle rotated to the recessionary downside, all this would reverse. Stocks would go down, interest rates would decline and investors would flee to bonds, raising their prices.

Thus, bonds served as a good portfolio diversifier, since their prices tended to move inversely to stocks. Hence, the traditional 60/40 portfolio: 60% stocks, 40% bonds, with periodic rebalancing between the two classes.

This approach still worked sort of OK from 2008-2021 or so. The Fed kept beating interest rates lower and lower, and so bond prices kept (fitfully) rising. But at last we hit the “zero bound”. Short- and long-term interest rates went to essentially zero in the U.S. (and actually slightly negative in some other developed countries). Rates had nowhere to go but up, and so bond prices had no place go but down, no matter how stocks performed.

Trillions of dollars of federal deficit spending to pay out various COVID-related benefits in 2020-2021, along with supply chain interruptions, ignited raging inflation in 2022, which the Fed belated addressed with a series of rapid rate hikes and reductions in its bond holdings. The end of easy (nearly no-interest) money and the prospect of a recession knocked stock prices down severely in 2022. However, the rise in both short term and long term interest rates also cratered bond prices. The traditional 60/40 portfolio was decimated. Thus, in an inflationary environment with active Fed intervention, bonds are much less useful as a portfolio diversifier.

Both the stock and bond markets seem to be now driven less by real-world considerations and more by expectations of Fed (and federal government) reactions to real-world occurrences. Pundits have noted the “bad news is good news” effect on stock prices: if GDP dips or unemployment rises (which used to be considered recessionary bad news), the markets cheer, assuming that if any real economic pain occurs, the federal government will flood us with benefits and the Fed will lower rates and buy bonds and otherwise facilitate the renewed deficit spending.   (See  The Kalecki Profit Equation: Why Government Deficit Spending (Typically) MUST Boost Corporate Earnings for an explanation of why deficit spending normally causes a rise in corporate profits, and hence in stock prices.)

In 2022, there was practically no place to hide from investment losses. Petroleum-related stocks furnished one of the few bright spots, but that was partly a function of economies recovering that year from COVID lockdowns. There is no particular reason to believe that petroleum stocks will rise in the next market downturn. Oil and gas stocks, along with gold and other commodities, might offer a certain degree of diversification, but none of these can be assumed to normally rise (or even stay steady) when the general stock market falls.

Managed Futures Funds as Portfolio Diversifiers

It turns out that there is one class of investable assets that does tend to rise during an extended market downturn, while typically rising slowly or at least staying level during stock bull markets. That is managed futures funds. These funds observe pricing trends across a wide range of commodities and currencies and bond markets, and buy or sell futures to try to profit. If they (or their algorithms) guess right, they make steady, small gains. If there is a new, strong trend that they can buy into, they can make a lot of money quickly. Such was the case for most of 2022. It was obvious that the Fed was going to raise rates heavily that year, which would drive up interest rates and the value of the dollar versus other currencies, and would crush bond prices. The managed futures funds shorted the Euro and bonds, and made a ton of money January-November last year. Investors who held these funds were glad they did. Charts to follow.

The first chart here shows the total returns for the S&P 500 stock index (blue) and a general bond fund, BND (purple), for the past three years, ending Feb 13, 2023. (Ignore the orange curve for the moment). This chart captures the short but very sharp drop in stock prices in early 2020, as COVID lockdowns hit, but government aid was promised.  Bonds did not greatly rise as stocks fell then, although after a bit of wobble they stayed fairly steady in early 2020.  However, when stocks slid down and down during most of 2022, bonds went right down with them (purple drawn-in arrow), giving no effective diversification. Both stocks and bonds rose in early 2023, showing what is now a positive correlation between these two asset classes.

Source: Seeking Alpha

The next chart (below) omits the bonds line, showing just the blue stocks curve and the orange curve, which is for a managed futures fund, DBMF. The drawn-in red arrows show how DBMF only dipped a little during the COVID crash in early 2020, and it rose greatly in 2022, as stocks (blue arrow) collapsed. This shows the power of managed futures for portfolio diversification.

Source: Seeking Alpha

There was a surprising break in futures trends in November, 2022, as markets suddenly started pricing in an early Fed pivot towards easing in 2023, and so interest rates rose, and bonds and the U.S. dollar tumbled. All the managed futures funds took a sharp hit Nov-Dec 2022; some of them recovered better than DBMF, which kept drifting down for the next few months. Without getting too deep in the weeds, DBMF is an exchange-traded fund (ETF) with favorable fees and taxation aspects for the average investor. However, its holdings are chosen by observing the recent (past few weeks) behavior of other, primary managed futures funds, and trying to match the average performance of these funds. Some of these other, similar funds are EBSIX, PQTNX, GIFMX and AMFNX. These are mutual funds, rather than ETFs, with somewhat higher fees and higher minimum purchases, depending on which “class” of these funds you go with (A, C, or I).

This average matching technique is good, because the performance of any single one of the major managed futures funds can be really good or really any particular year. Some of these individual funds have done consistently horribly, so you’d be in bad shape if you happened to pick one of those. But the average of all those funds, as quantified by a relevant index, does OK and so does DBMF. However, as observed by Seeking Alpha author Macrotips Trading, because of its backwards-looking matching methodology, DBMF can be appreciably slower than other funds to adjust its positions when trends change. KMLM is another managed futures ETF, which tends to be more volatile than DBMF; higher volatility may be desirable for this asset class.

One Fund to Rule Them All

A recommended application of these managed futures funds is to replace maybe a third of your 40% bond holdings with them. Back testing shows good results for say a 15 managed futures/25 bonds/ 60 stocks portfolio, which is periodically rebalanced.

What if there was a fund which combined stocks and managed futures under one wrapper? There is one I have found, called REMIX. It has an “institutional” class, BLNDX, with higher minimum purchase and slightly lower fees, which I have bought into. The chart below shows the past three years of performance for the hybrid REMIX (orange) compared to stocks (blue) and the managed futures-only fund DBMF. We can see that REMIX stayed fairly flat during the COVID blowout in 2020, and it rose along with stocks in 2021, and went roughly flat in 2022 instead of dropping with stocks (see thick drawn-in yellow arrows). The performance of REMIX is actually better than a plain average of stocks (blue curve) and DBMF (purple), so this is an attractive “all-weather” fund.  A similar hybrid (multi-asset) fund is MAFCX, which has higher fees but perhaps slightly higher returns to date. MAFCX buys stock (S&P500) futures rather than the stocks themselves, which is a leveraged play – – so for $100 investment in MAFCX you get effectively $100 worth of managed futures plus $50 worth of stock investment.

Source: Seeking Alpha

Caveat on Managed Futures

Managed futures put in an outstanding performance in 2022 because there was a well-telegraphed trend (Fed raising interest rates) in place for many months, which allowed them to make easy profits at the same time that stocks were crashing. But we cannot assume that managed futures will always go up when stocks go down. That said, managed futures will likely be reasonable diversifiers, since they should at least stay roughly level when stocks go down. The trick is to not grow impatient and dump them if their prices stagnate during a long bull stock market phase.  Holding them in the form of a multi-asset fund like REMIX may help investors hang in there, since it should go up in a bull market (due to its stock component), while offering protection in a bear.

For instance, below is a five-year chart of a managed futures fund ( EBSIX, purple line ), the S&P 500 stock index (blue line), and a multi-asset fund that combines stocks and managed futures ( MAFIX, orange line. This is the institutional version of MAFCX).    The charting program did not account properly for the Dec 2022 dividend of MAFIX, so I extended its curve with a short red line at the right-hand side to show what it should look like if plotted on a consistent total return basis.

With perfect hindsight, I chose a managed futures fund (EBSIX) which has performed among the best over the years; many other such funds would have looked far worse. There was a period of nearly two years (mid-2020 -early 2022) when this fund lagged far behind stocks.  It was only when the 2022 catastrophe arrived that the managed future fund EBSIX proved its worth and shot up. The multi-asset fund MAFIX, which is similar to REMIX but with higher fees, basically kept up with stocks in their bull phase, then held more or less steady for 2022, and ended much higher over five years than either SP500 or the plain EBSIX.

Source: Seeking Alpha