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The narrative for holding an allocation to commodities by looking through a macro factor lens may generate different conclusions than taking a micro market-specific perspective. While the macro perspective is good for setting longer-term strategic allocations, the micro perspective helps with tactical decisions on where or how to put money to work in commodities.

I would not be the first person to engage in the lazy thinking that managed futures are synonymous with trend-following. For many years, there was little wrong with using both terms to mean the same thing. The majority of managed futures are still trend-following.

It does matter what an investment strategy will do on a stand-alone basis; however, it really matters what an investment will do when added to an already diversified portfolio. For any strategy allocation decision, it is all about the marginal contribution to portfolio return and risk. Most investors know this intuitively, but they often do not focus on the marginal portfolio contribution in practice.

The general view is that an investor should pick good managers who have had a track record of success, but a more nuance look at data suggests that buying when good managers underperform can be valuable. Whether past performance provides some indication on future success has been one of the key issues facing any investor. We now have an interesting perspective from Brad Cornell, Jason Hsu, and David Nanigian in their Journal of Portfolio Management paper, “Does Past Performance Matter in Investment Management Success”.

Managed futures, as a hedge fund strategy, have moved off of its max drawdown since June, its worst drawdown in the last five years, as measured by the SocGen CTA index. For some investors this type of drawdown means an exit from the strategy; however, some of the broader data on manager selection suggest a different approach. The idea of being careful about making investment decision based on a drawdown is consistent with the mean reversion performance analysis of winners and losers.

The take-away quote from Yellen this week, “The relationship between the business cycle and the yield curve may have changed.” There was little supporting evidence for her view. It is the hope of the Fed that further rate increases which may further flatten the yield curve will not reverse the current course of the economy.

Equities are overvalued! Bonds are overvalued! In the minds of many investors everything is overvalued given central bank distortions, yet there may be an exception. Look at commodities. The difference between financial and real asset could not be larger. Financial assets have steadily moved higher while commodities have fallen or at best moved sideways relative to risky stocks in the last 5+ years. This relationship has applied to all equity indices around the world to varying degrees.

John F. Kennedy’s aphorism “a rising tide lifts all boats” seems to be particularly appropriate when describing the results of both the domestic and international equity markets these past 30 days.

The current buzzword used with quant investing is “machine learning.” Many quants may like to appear more intelligent by peppering their strategy discussions with comments like, “We use machine learning to create new and enhance our existing models.” Yet many investors don’t fully appreciate that machine learning is a term that refers to a broad […]

“What I think HBS does and does very well is train people to, in situations of ambiguity, to take imperfect information, uncertain outcomes, and tight deadlines and figure out what to do in the most effective, efficient, and powerful way.” – Casey Gerald from The Golden Passport: Harvard Business School, the Limits of Capitalism, and the Moral Failure of the MBA Elite by Duff McDonald

The Fed has become more focused on financial market conditions since the Financial Crisis. There is less interest in the classic goal of managing full employment since by many measures we may beyond the natural rate of full employment, and there is admitted confusion on how to control inflation.