Managed Futures: How Trend-Following Strategies Work and When They Perform

Managed futures is one of the most misunderstood alternative investment strategies available to sophisticated investors. The term refers to systematic trading programmes that take long and short positions across a broad range of futures contracts — covering equity indices, government bonds, currencies, and commodities — using trend-following and other quantitative signals. The strategies are run by Commodity Trading Advisors (CTAs), a regulatory category under US CFTC rules.

Despite their complexity, managed futures have a compelling feature that distinguishes them from most alternative investments: they have historically performed well during equity market crises, providing genuine portfolio diversification precisely when it matters most.

This guide is for information purposes only and does not constitute a recommendation to invest. Managed futures strategies carry significant risk, including the risk of loss of capital. Past performance is not indicative of future results. Seek independent financial advice.

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What Are Managed Futures?

Managed futures programmes trade exchange-traded futures contracts. These are standardised, liquid contracts obligating the buyer or seller to transact an underlying asset at a set price on a future date. Futures contracts exist for equity indices (S&P 500 e-mini, Euro Stoxx 50, FTSE 100), government bonds (US Treasury futures, German Bund futures, Gilt futures), currencies (EUR/USD, USD/JPY, GBP/USD futures), commodities (crude oil, gold, copper, agricultural commodities), and other markets.

Because futures are traded on exchange and are liquid, managed futures programmes can go both long (benefiting if the market rises) and short (benefiting if the market falls). This is the crucial distinction from long-only investment funds.

Most managed futures programmes use trend-following as their primary strategy. Trend-following is the systematic identification and exploitation of sustained directional moves in prices — buying markets in established uptrends and selling (going short) markets in established downtrends. The premise is that price trends exist across markets and time horizons because of slow-moving fundamental forces: economic cycles, central bank policy cycles, commodity supply-demand shifts, and investor behavioural tendencies.

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How Trend-Following Works in Practice

A typical trend-following programme operates roughly as follows:

1. Signal generation: The system calculates a signal for each market based on price momentum over multiple time horizons — typically 1 month, 3 months, 6 months, and 12 months. A market showing upward price momentum across time horizons generates a buy signal; downward momentum generates a sell (short) signal.

2. Position sizing: Position sizes are determined by a volatility-targeting process. More volatile markets receive smaller positions so that the contribution to portfolio risk is roughly equal across all markets. Total portfolio risk is then scaled to a target annualised volatility — typically 10–20% for most programmes.

3. Diversification across markets: A well-constructed trend-following programme trades 50–150 different futures markets simultaneously. This diversification is part of the risk management — not all trends will be in place at once, and diversified exposure reduces the impact of any single position going against the programme.

4. Stop management: Positions that move against the trend signal are reduced or closed. The system has no ego about admitting a trend has reversed.

The key insight is that trend-following profits from extended directional moves. It loses money (pays for "insurance") during choppy, range-bound markets where price signals reverse frequently before a trend develops. This creates a characteristic return pattern: positive skew — a portfolio that loses small amounts frequently but profits significantly during trending environments.

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Historical Performance During Crises

The most cited feature of managed futures strategies is their performance during equity market drawdowns:

• 2000–2002 (dot-com bust): Bond futures surged as the Fed cut rates; equity short positions were profitable. CTA indices delivered strong positive returns while equities fell 40–50%.
• 2008 global financial crisis: Equity indices fell globally; bond futures trended upward (yields fell); commodity trends reversed sharply. The Barclay CTA Index returned approximately +14% in 2008 while the MSCI World fell approximately 40%.
• 2022 inflation shock: This year was exceptional. Managed futures delivered their best performance in decades — roughly +25–40% for many trend-following programmes. The reason: 2022 featured strong, sustained trends in almost every major market simultaneously. Bonds fell sharply (short bond position profitable), equities fell (short equity position profitable), commodities surged (long commodity position profitable), and the US dollar strengthened (long USD position profitable). It was a rare alignment of macro trends that played perfectly to the strategy's strengths.

These crisis-period positives come at a cost: during long equity bull markets, managed futures strategies typically underperform equities and may produce flat or modestly negative returns. The 2010–2019 decade saw persistent underperformance versus equity indices for most CTA strategies, as low volatility, central bank suppression of bond yields, and range-bound commodity prices created unfavourable conditions for trend-following.

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Key Performance Drivers

Managed futures returns depend on three conditions being met:

1. Trends exist in the markets traded — sustained directional moves lasting weeks to months.
2. Trends are captured efficiently by the trading signals before they end.
3. Diversification across markets prevents any single reversal from eliminating gains elsewhere.

When all three align — typically during major macro regime changes (rate cycles, currency crises, commodity supercycles) — managed futures strategies excel. When markets trend sideways or central bank intervention dampens natural price discovery, performance suffers.

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How to Access Managed Futures

UCITS-Compliant Funds

UCITS regulation in Europe allows managed futures strategies to be offered in a regulated, liquid fund structure. Major options include:

• Man AHL Trend Alternative UCITS: one of the largest and most established, run by Man Group's quantitative subsidiary AHL. Long track record dating to 1987.
• Winton Trend Fund (now Winton Fund): another established CTA running trend-following and diversified quantitative strategies.
• Graham Global Investment Fund: US-based CTA also offering UCITS-registered products.
• iMGP DBi Managed Futures Strategy ETF: an ETF that replicates managed futures exposure by using a quantitative model to track CTA returns using liquid futures.

UCITS funds in this space typically carry TERs of 1.0–1.75%, which is material but not unreasonable given the active management involved.

Fund of Funds

Some fund-of-funds allocate to multiple CTA managers, providing diversification across managers and styles (pure trend-following, diversified quantitative, macro-discretionary). This adds another layer of fees.

Direct Managed Account

Sophisticated investors and family offices may access CTAs via separately managed accounts, which offer full transparency on positions, customisation of leverage and risk, and potentially better fees. Minimum investment sizes are typically $5m–$50m.

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Risks

Model Risk

All systematic strategies are based on models that assume the future will resemble the past in some systematic way. Models that have worked historically may stop working if the market dynamics they exploit change — for instance, if central bank intervention permanently suppresses price trends.

Regime Dependency

Trend-following specifically requires trending markets. In range-bound, low-volatility environments, strategies incur frequent small losses ("whipsaw") and can underperform for extended periods. Investors need the conviction to hold through 2–5 year periods of underperformance.

Leverage

Managed futures strategies use futures, which are inherently leveraged instruments. Gross notional exposure of a typical portfolio is often 3–10x net asset value. Leverage amplifies both gains and losses, and while risk management frameworks typically limit drawdowns, sudden market dislocations (flash crashes, circuit-breaker events) can create losses that exceed normal expectations.

Fee Drag

Traditional CTA fee structures are 2% management fee plus 20% performance fee. UCITS funds have simplified this somewhat, but fees remain meaningful relative to passive alternatives. The fee drag over a flat or modestly positive environment can be significant.

Counterparty and Execution Risk

Trading on multiple exchanges across multiple jurisdictions creates operational complexity. Execution quality, clearing arrangements, and counterparty risk at futures brokers are genuine operational considerations.

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Portfolio Role and Sizing

Managed futures typically serve as a crisis hedge and diversifier within a broader portfolio, analogous in function to a long-duration government bond allocation but with positive expected returns over the long run (government bonds, by contrast, have negative real expected returns at low yield levels).

A typical allocation within an HNW portfolio is 5–15% of total assets. The strategy's value is primarily in its correlation properties — the fact that it tends to make money when equities and bonds both fall, as in 2022 — rather than its standalone expected return, which has been modest after fees over the past decade.

Managed futures pair particularly well with equity-heavy portfolios. An equity portfolio that allocates 10% to managed futures has historically achieved a meaningfully better risk-adjusted return (Sharpe ratio) and smaller maximum drawdown than a 100% equity portfolio, despite forgoing some upside during bull markets.

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How Global Investments Can Help

Global Investments advises internationally mobile HNW clients on portfolio construction across liquid and illiquid asset classes. We can help you evaluate whether a managed futures allocation is appropriate for your specific portfolio — assessing the expected correlation benefits, the likely tracking error during periods of underperformance, and the most suitable vehicle for your domicile, tax position, and liquidity needs. We work with a range of systematic managers and can provide introductions to established CTAs for larger managed account allocations.