Time Variation in the Benefits of Managed Futures

Abstract

This article provides new evidence on the return/risk benefits of adding managed futures to the investment set. We investigate four mean-variance efficient allocations, ranging from conservative to aggressive. The results indicate that with as little as 10% of the original portfolios reallocated to futures, portfolio return (risk) is significantly increased (decreased) for all four allocations. Importantly, the analysis shows that a simple indicator of the Fed's monetary policy stance can be used to reliably forecast when futures provide the most benefit. Specifically, significant improvements in Sharpe ratios occur when the Fed takes a restrictive monetary policy stance (about half the time over our 40-year sample). In contrast, there is no significant improvement when the Fed takes an expansive policy stance. Finally, the authors show that these results are consistent through time.