Managed futures funds shone brightly in what was an otherwise brutal third quarter for investors. Duncan Wilkinson, CEO of AlphaSimplex, said the ability to go long and short -- and not be dependent on stocks alone -- were the keys to success.
"Because this strategy has the ability to go long and short, it is not dependent on any asset class going up. Down markets can also be an opportunity to profit," said Wilkinson. "It is also focused not just on stocks, but bonds, rates, currencies and commodities."
Wilkinson's trend-following Natixis ASG Managed Futures Strategy (AMFAX) - Get Report was up over 2% in the third quarter, which was consistent with the NewEdge trend index that is an equal weight of the largest trend-following hedge funds. For comparison's sake, the S&P 500 (SPY) - Get Report was down around 6.5% over the same period.
Wilkinson said there is no clear trend right now in equities, which makes him cautious around equity exposure. He said the equity market might continue to see these periods of ups and downs with no particular trend, which is a challenging environment for any investor. He added that this is in stark contrast to last year, where there was a solid trend in U.S. stocks that benefited investors who stuck with it.
He said another shift has been in currencies, where the once hugely popular trade to go long the U.S. dollar and short the euro and yen has broken down.
"We were in that trade as well, and right now we are positioned out of it," said Wilkinson. "We feel that trade has extended to the point when we don't see a strong trend in that, so we are no longer short those currencies as much as we were earlier in the year."
A stronger trend to follow, according to Wilkinson, is to short weakening emerging market currencies, which he said "makes sense" because of China's slowing economy.
When it comes to commodities, Wilkinson said the stabilization of prices in major raw materials like oil and gold makes it difficult for managed futures funds to participate because of the lack of a trend to follow. As a result, he said his fund is looking further afield to agricultural commodities like corn and wheat.
Finally, when it comes to the Federal Reserve'slooming interest rate hike decision, Wilkinson said he would prefer it to come sooner rather than later because his fund holds short-term paper that supports the futures contracts it purchases.
"If rates go up, that's a bit of a tailwind for us," said Wilkinson. "So I would like the Fed to get up and begin to raise interest rates. At some point they are going to have to."