The Concept of Non-Correlation

The potential to reduce risk is possible due to the low to slightly negative correlation of managed futures to traditional asset classes, such as stocks and bonds. Managed futures investments have historically performed independently of traditional investments, such as stocks and bonds. This is referred to as non-correlation or the potential for managed futures to perform well regardless of whether traditional equity and fixed income markets are rising or falling.

Understanding Correlation

Correlation measures the degree at which two assets move in similar patterns. Diversifying a portfolio by allocating to assets that tend to move in different directions under varying market conditions can potentially dampen overall portfolio volatility without necessarily limiting expected returns. One asset′s rising returns can help offset another asset′s falling returns.

Correlation is measured by a correlation coefficient – in values between -1.0 and 1.0. A portfolio with a correlation of 1.0 means that its returns move in the same direction as the index, whereas a correlation of -1.0 means that it moves totally the opposite direction of the index. To spread your risk, you would want the assets in your portfolio to have varying degrees of correlation among themselves.

Correlation Analysis

Direction of Returns

Another method to evaluate the relationship between managed futures and stocks is to consider the frequency with which they move, or do not move, in the same direction.

• In nearly 50% of those months managed futures moved opposite from stocks.
• In 35% of those months both managed futures and stocks posted positive returns.
• In 17% of those months both managed futures and stocks moved lower.

Next: Diversification and Performance