Hedge Funds versus Managed Futures as Asset Classes

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Abstract
Portfolio theory focuses on constructing optimal portfolios of assets to maximize expected return and minimize risk. In informationally efficient markets, the prescription is generally to buy and hold a broadly diversified portfolio. In theory, fairly priced derivative instruments do not add anything of importance to the mix, since their payoffs can be replicated using the underlying assets. And there is no role for speculation, against the efficient prices in the market. Among real-world investors, however, there is considerable interest in funds that specialize in trading futures, as well as in hedge funds that may engage in all sorts of speculation. Historically, some funds based on these non-standard assets appear to have done extremely well, but others have not. This article takes a thorough and comprehensive look at the historical performance of managed futures and hedge funds alone and as components of a broadly diversified asset portfolio. The overall result is that they have historically tended t...

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