Revisiting Kat’s Managed Futures and Hedge Funds: A Match Made in Heaven from Sunrise Capital

Why Tactical Macro Investing Still Makes Sense — Further Revisiting Kat’s “Managed Futures and Hedge Funds: A Match Made in Heaven” (PDF):

In November 2002, Cass Business School Professor Harry M. Kat, Ph.D. began to circulate a Working Paper entitled Managed Futures and Hedge Funds: A Match Made in Heaven. The Journal of Investment Management subsequently published the paper in the First Quarter of 2004. In the paper, Kat noted that while adding hedge fund exposure to traditional portfolios of stocks and bonds increased returns and reduced volatility, it also produced an undesired side effect — increased tail risk (lower skew and higher kurtosis). He went on to analyze the effects of adding a macro investment approach known as “managed futures” to the traditional portfolios, and then of combining hedge funds and managed futures, and finally the effect of adding both hedge funds and managed futures to the traditional portfolios. He found that managed futures were better diversifiers than hedge funds; that they reduced the portfolio’s volatility to a greater degree and more quickly than did hedge funds, and without the undesirable side effects. He concluded that the most desirable results were obtained by combining both managed futures and hedge funds with the traditional portfolios. Kat’s original period of study was June 1994–May 2001. In this paper, we revisit and update Kat’s original work. Using similar data for the period Jan 2001–December 2015, we find that his observations generally hold true about 15 years later. During the subsequent 141⁄2 years, a highly volatile period that included separate stock market drawdowns of 36% and 56%, managed futures have continued to provide more effective and more valuable diversification for portfolios of stocks and bonds than have hedge funds.

More from Sunrise Capital:

Jason Gerlach appears on my podcast.

The Little Book of Trading (first chapter features Sunrise Capital).