Cliff Asness in Morningstar:
“Managed futures is a strategy that has been around pretty much as long as futures markets have been around. Historically, it’s been a strategy pursued primarily by futures traders and in the last 10-20 years by hedge funds. The trading strategy employed by most managed futures funds boils down to some type of trend-following strategy, which is also known as momentum investing. Simply put, momentum investing is buying securities that are improving and selling securities that are deteriorating. There has been a mountain of research since the early 1990s showing that momentum “works”–meaning that price momentum has significant predictive power. Beyond this empirical evidence, there has also been considerable behavioral finance research to explain why trends tend to persist. I’ll mention three key reasons:
1. Anchoring and adjustment. This refers to the observation that people adjust their expectations more gradually than they should. This initial underreaction to news gives the trend follower an opportunity to buy at a price before the price has fully adjusted.
2. Central banks. These institutions like stable exchange rates and interest rates, and that causes them to generally trade against price moves. As they make what should happen instantly happen slowly over an extended period, you can seek to profit from the initial trend.
3. People tend to chase performance. We don’t need to look any further than our own industry to see this. Mutual funds that have had strong performance tend to attract strong asset inflows. Once an initial trend develops, the trend can persist simply from the buying or selling pressure coming from performance-chasing. This herding activity can often lead to prices even moving past fundamental value, creating longer-lasting trends.”