Can something be a secret if everyone in the world knows about it, but you? In the case of Canadian investors and managed futures investing strategies, it appears so. Although not readily identifiable as an asset class, managed futures programs (run by commodity trading advisors, or CTAs) are multi-strategy alternative investments that invest in futures contracts and options on virtually any tradeable entity, including commodities, currencies, interest rates and equities.

CTAs also generally add sophisticated risk-management overlays to their models to reduce the downside volatility in their performance. Of the three main managed futures trading strategies (trend following, non-trend following, and relative value), trend-following CTAs garner most of the investing public’s attention. Trend following strategies, as the name implies, aim to profit from identifiable trends in liquid public markets, whether positive or negative. This is generally achieved through the use of quantitative momentum analysis. CTAs take advantage of market inefficiencies by exploiting serial correlation observable in asset prices.

Serial correlation refers to the tendency of markets to continue to trend over time, which is why most (but not all) CTAs fit into the bucket of trend followers. They make no attempt to predict where the market is heading. Rather, they apply their analysis to determine in what direction the market is currently moving and, in effect, jump on for the ride.

When compared with public equity performance, managed futures programs have the very unusual characteristic of displaying strong negative correlation during bear markets and moderately positive correlation during bull markets. In fact, over the 30-year period between 1980 and 2010, global CTA performance yielded compounded annual returns of more than double that of the S&P 500 — with lower volatility. In 2008, when most investment strategies became highly correlated, CTAs collectively delivered one of their best years on record, significantly diminishing the negative effects of almost every other investment in global portfolios.

For anyone subscribing to modern portfolio theory (Google Harry Markowitz and Nobel Prize), including an investment strategy with these features in a portfolio would be beneficial over virtually any time period. And this is exactly what sophisticated investors around the world have been doing for years. In Europe, where alternative investing is far more mainstream than in North America, managed futures have a secure place in most institutional portfolios. And worldwide, managed futures funds’ assets under management are reported to have grown to represent the largest subset (estimated at 15% to 20%) of the hedge fund universe.

Many of the world’s best-respected institutions invest in large managed futures fund of funds such as LGT’s Crown Managed Futures Fund, which, over the past 10 years, provided excellent protection in down markets while providing annualized compounded risk-adjusted returns well in excess of global equity markets.

In Canada, managed futures funds are slowly gaining notice. Investment managers such as Auspice, Integrated Managed Futures, Blackheath, Acorn and Man AHL offer funds, available to qualified Canadian high net worth investors only. Definitions of qualified vary from province to province amid different rules, but in Ontario it’s those with financial assets of more than $1-million.

Their performance would have provided both risk-mitigation and return-enhancement to virtually any Canadian investor over the past five years. For ordinary investors wishing to invest in CTA-driven funds (note that there are sometimes differences between the performance of these funds and that of high-net-worth focused offerings), BluMont Capital offers the Exemplar Diversified Portfolio (minimum investment of $1,000 ) fund and Man AHL offers the Man AHL Diversified fund (minimum investment of $5,000).

Additionally, retail investors will soon be able to invest in at least one Canadian ETF that will track the Auspice Managed Futures Total Return Index, which has posted very impressive gains since inception. If you’re like most market observers, you probably agree the only safe bet regarding the behaviour of the financial markets for the near future is that there will continue to be high volatility and that at least half of the financial oracles will be wrong in their predictions.

As long as there are trends in those markets, however, managed futures programs will benefit. Ever heard the expression I have no idea where I’m going but I’m making great time!? Well, I have no idea where the market is going. But with an allocation to managed futures in my portfolio, I am making great time.

David Kaufman is the president of Westcourt Capital Corporation, an Exempt Market Dealer specializing in conservative, alternative income-generating investments. drk@westcourtcapital.com