“The efficient frontier” (below) illustrates the benefits of allocating to alternatives with a sizable percentage to managed futures. “Mix and match” demonstrates that as the contribution to alternatives increases, all four components of the return distribution benefit: Mean return increases, standard deviation decreases, skewness increases and kurtosis decreases.
Investing in managed futures can improve the overall risk profile of a portfolio far beyond what can be achieved with hedge funds alone. An allocation to managed futures not only neutralizes the unwanted side effects of hedge funds, as was best illustrated in 2008, but also leads to further risk reduction. With its potential for strong returns, these benefits come at a low price.
Thomas Rollinger, a 16-year veteran of the managed futures industry, is director of new strategies development for Sunrise Capital Partners. Prior to joining Sunrise, Rollinger studied under — and was a portfolio manager for — quantitative hedge fund legend Edward O. Thorp.