Harry M. Kat
Volume 2, Number 1, First Quarter 2004
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. 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. Apart from their lower expected return, managed futures therefore appear to be more effective diversifiers than hedge funds. 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.