The public is flocking into short option and high frequency programs at current–many of which are held out as managed futures investments. With a current low VIX both of these programs perform nicely. As a result money flows out of trend following or doesn’t flow there at all. When the market invariably melts the VIX will explode. High frequency and short option jockeys (i.e. LTCM) will lose dramatically while trend followers will do very well.
However, when this happens investors will sour on the managed futures asset class. Why? Because the public is putting money into programs that will lose in the face of disaster. This is a major conundrum with the phrase managed futures–it’s an umbrella term that groups polar opposite investing strategies. Short option programs are highly correlated with an advancing market and when equity markets fail–so will they. Trend followers are loosely correlated with equity markets and when equities decline they will typically make the big money.
End result? The general public is doomed to failure as they chance their returns. They have a tendency to put money into programs at the wrong time. Allocate to trend followers when the VIX is low. Buy trend followers on drawdowns and don’t chase returns—that makes much more sense.
Think about it.
Note: Trend following is the primary strategy under the managed futures headline.