MANAGED FUTURES AND HEDGE FUNDS: A MATCH MADE IN HEAVEN

Harry M. Kat

In this paper we study the possible role of managed futures in portfolios of stocks, bonds, and hedge funds. We find that allocating to managed futures allows investors to achieve a very substantial degree of overall risk reduction at, in terms of expected return, relatively limited costs. Apart from their lower expected return, managed futures appear to be more effective diversifiers than hedge funds. Adding managed futures to a portfolio of stocks and bonds will reduce that portfolio’s standard deviation more and quicker than hedge funds will, and without the undesirable side effects on skewness and kurtosis. The overall portfolio standard deviation can be reduced further by combining both hedge funds and managed futures with stocks and bonds. As long as at least 45–50% of the alternatives allocation is allocated to managed futures, this will have no negative side effects on skewness and kurtosis.