Lessons to Learn From Last Week's Market Turbulence

Big stock market losses usually offer investment lessons, and last week's plummet was no exception

John Rekenthaler 12 February, 2018 | 10:40AM
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Diversify Your Hedge

Managed-futures funds protected beautifully against the 2008 financial crash. Not that retail investors benefited. With one exception, the managed-futures funds that existed at the time were hedge funds, meaning that they weren’t available for the rank-and-file. Too bad. Between late 2007 and early 2009, from the stock market’s peak to trough, the average managed-futures hedge fund gained 12% while stocks dropped 41%.

The fund industry rapidly filled the gap; today, there are 43 managed-futures funds in the US – 124 counting all their share classes. To date, those funds haven’t helped their investors, not necessarily through mismanagement, but rather because there hasn’t been any point in cushioning stock-market exposure. The more equities, the better. Hedging against downturns has meant leaving money on the table.

Last Monday, that changed, with the S&P 500 dropping by 4.1%. At least for the one day, managed-futures funds had their opportunity. And they… declined by an average of 3.1%. This showing would have come as no surprise to careful Morningstar readers. Last week, Morningstar analyst Tayfun Icten published an article entitled, “Managed-Futures Funds Vulnerable to Market Turbulence,” because, he wrote, they currently have a long position in equities. Four days later, he was proven correct.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is vice president of research for Morningstar.