CATALYST FUNDS RESEARCH
ADDING ALTERNATIVES: Seeking to Manage Drawdowns with Managed Futures
July 2018 | Public Version
Key Takeaways
- There are many risk factors that could trigger a potential equity market drawdown. Bonds may no longer be effective at buffering losses.
- Since 1950, the S&P 500 Index has spent over 74% of the time in a drawdown, with corrections in excess of 10% occurring more frequently than many investors realize.
- Managed futures1 have not witnessed a drawdown worse than 10% in 26 years and have never experienced a drawdown in excess of 20%.
- Historically, implementing managed futures exposure into a portfolio may have resulted in higher returns with reduced drawdowns and lower volatility.
The return of volatility, increasing political and economic risk factors and rising interest rates have characterized 2018. Because of this bull market’s incredible run, investors may overlook the fact that, since 1950, the S&P 500 Index has spent more than 74% of the time in a drawdown, with nearly half of the time spent in a drawdown exceeding 10%. While losses are a normal part of any well-functioning market, double-digit declines can lead some investors to make rash and emotional decisions that undermine a longer-term focus.
At Catalyst Funds, we believe that there are many risk factors (e.g., trade war and other political risks, rising interest rates, etc.) that could trigger a potential drawdown in the equity markets. Historically, an allocation to bonds was effective in buffering the impact of an equity market drawdown. However, rising interest rates from a zero interest-rate policy creates the risk that both equities and bonds could decline during the next drawdown.
Investors should consider integrating managed futures exposure into their portfolios in an attempt to provide an uncorrelated return stream and also reduce the impact of equity market drawdowns.
Alternative investments may not be suitable for all investors and an investment in alternative funds is suitable only for investors who can bear the risks associated with the illiquidity of the fund’s shares and should be viewed as a long-term investment.
Since 1950, the S&P 500 Index has spent 15.6% of the time in a drawdown in excess of 20% and 74.4% of the time in any drawdown.
Past performance is no guarantee of future results. The referenced indices are shown for general market comparisons and are not meant to represent any fund. Investors cannot directly invest in an index; unmanaged index returns do not reflect any fees, expenses or sales charges.
4913-NLD-7/23/2018
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