And The Most Difficult Futures Contract Is…

May 3, 2017

Treasury futures. Hands down. There’s a derivative for everything out there today: S&P minis, EUR/USD, and of course the standard commodities futures like soybeans and oil. But the most difficult one for clients to grasp is the treasury future, says Nicholas Houle, principal at Icon Alternatives, a managed futures brokerage in Bloomingdale, Ill. “Treasury futures work inversely to rates, and rates are all quoted and spoken about on TV as the rate and not the futures price so in general, rates go up, treasury futures go down. And the main reason it can be so difficult to grasp is due to how they are priced,” he says. Treasury futures are quoted in 32nds and the options are in 64ths. One 32nd is worth $31.25, one 64th is worth $15.625. Confusing? Most clients aren’t going to understand this one. “It’s a lot of math for clients to do quickly in their head,” he says. Icon Alternatives exists to help investors understand managed futures contracts. The notion is that by adding managed futures to a diversified portfolio of stocks and bonds, the annual drawdown is lower so investors have some protection in a down market.

In a study by the CME Group taking a diversified global stock and bond fund and comparing it to one holding a 20% weighting to managed futures contracts between January 1980 and March 2012, the diversified fund wins. “Many investors don’t even know that since 1974, when IRAs were put into effect, they have had more options to invest other than stocks and bonds,” says Houle. “There are options to diversify — whether it is in real-estate, private equity or in commodities. Every investment has risk, but the biggest risk is the lack of education in opportunities and managing risk.” Some commodities have enough liquidity to go out years in advance on futures contracts, but market forces constantly change the outlook for prices. In 2008 for instance, oil futures for 2020 contracts were surely priced over $180 a barrel. If you’re still holding out for $180 a barrel, you’re not getting it three years from now. The January 2020 oil futures contract is now priced at just $49. “Most futures are held for under a year,” says Houle. Capital gains on futures are taxed at a blended short-term, long-term rate. Icon works one-on-one with investors to go over the best derivative play for their risk appetite. They have their own product platform that allows clients access to tradable managed futures products. The platform displays manager’s history, combined multi-product hypothetical performance and important product metrics such as market correlations, peak-to-valley drawdowns. “If a client has their own strategy in mind, we will build a customized trading plan for them,” Houle says. There are a number of mutual funds in this space as well. Here’s a random list of five.

Mutual fund	AUM	YTD	Inception
AQR Managed Futures Strategy (AQMIX)	$12.7b	-3.22%	-9.44%
Altegris Managed Futures Strategy (MFTAX)	$172.2m	-1.43%	-16.16%
Guggenheim Series Trust Futures (RYMTX)	$97.4m	2.41%	-15.37%
Natixis ASG Managed Futures (AMFAX)	$3.04b	0.51%	-3.15%
Equinox MutualHedge Futures (MHFCX)	$278.7m	2.93%	-13.98%

Most of these funds are under 10 years old. The Auspice Managed Futures Excess Return Index is down 12.75% year to date. The index was back tested starting in 2000 and launched in 2011. Based on the indices performance table this year, 2017 has not been the best year for managed futures. The index is down all four months. It rose 4.87% in 2016. Its best year was the crisis year of 2008, rising 42.65%.