The increasing correlation of everything has been a recurring market theme for much of the last two years. But the combination of a little-known Standard and Poor’s index and the Rydex Managed Futures Strategies Fund (RYMFX) delivers an investment that over more than 20 years of market history—and almost any period within that history—is pretty much uncorrelated with everything. And that includes the investment class it is named for, one of the most historically reliable portfolio diversifiers of all: actively managed, managed futures strategies.

RYMFX was launched in March 2007 aiming to replicate the performance of the S&P Diversified Trends Indicator, a long-short futures investment strategy based on 24 U.S. exchange-traded futures contracts, in 14 sectors, divided evenly among commodity and financial markets.

The DTI, like most actively managed futures strategies, is based on technical indicators and is “positioned each month ... based on price behavior relative to its moving average,” allowing it to capture profits in both up and down markets, according to an S&P white paper. Its extraordinary noncorrelation is a function of a design that, while implementing its market view through futures contracts, includes a package of rules that few, if any, managed futures advisor would follow:

• The deliberate 50/50 split between financial and commodity futures is rare, at least as a point of portfolio discipline. Leading ‘commodity trading advisors’ have long concentrated their portfolios in financial futures, including stocks, bonds and currencies.
• The DTI ‘trades’ only futures contracts that are listed on U.S. exchanges, although some, including currency markets, offer international exposure; most large, diversified CTAs trade markets worldwide.
• In a bid to minimize stock market correlation, DTI does not play stock index futures, which account for a material proportion—20 percent is not uncommon, sometimes more, depending on the strength of the trading signals—of large diversified active futures managers.
• It does not short the energy complex, because “no other sector is subject to the same continuous supply and concentration risk,” according to the white paper, although an alternative explanation is that energy proved a tough short in development and backtesting. (That does not mean it is always long energy: If a sell signal is issued, the DTI goes flat.)
• Finally, and perhaps most importantly, the index’s monthly rebalancing interval.

Active futures managers generally fall into two camps: short-term traders, who initiate positions expecting to be out of them within a week and merrily scalp intra-day moves; and long-term traders, who initiate positions hoping to hold them for at least several weeks, and often months, as trends play out.

The latter group is largely responsible for the industry’s overstated reputation for volatility. Risk management will kick them out of positions when inevitable corrections disrupt long-term trends; cutting, sometimes viciously, into profits.

Performance Charted
Because it’s still not possible to buy groceries with noncorrelation, Figure 1 shows the annual performance of two widely followed active managed futures indexes against the DTI and stock and bond benchmarks over the current market cycle, from 2000 through June 30, 2007. Both conventional managed futures benchmarks, Barclay Trading Group’s BTOP50 and the Credit Suisse-Tremont Managed Futures Index (see definitions below), clearly outperformed the S&P 500 during the 2000-2002 bear market, but have since underperformed.



And while the DTI has hardly blown any doors off, it has been profitable, avoided the stock market declines and shown a fraction of the volatility of the other benchmarks.

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