In this episode we answer emails from Postmaster, John, and Patrick. We discuss the ins and outs of managed futures, the outs of international bonds and currency funds, and Risk Parity Chronicles. Reborn!
And THEN we our go through our weekly portfolio reviews of the eight sample portfolios you can find at Portfolios | Risk Parity Radio.
Additional Links:
Father McKenna Center Donations: Donate - Father McKenna Center
Demystifying Managed Futures Article: Demystifying Managed Futures
DBMF Video (and link to YouTube channel): DBMF in Four Minutes
Morningstar Article re Alternatives: How ETF Diversifiers Performed During Market Turmoil | Morningstar
Summary: “The Misbehavior of Markets”. A Fractal View of Risk, Ruin, and Reward by Benoit Mande
Risk Parity Chronicles Shannon's Demon Article: Shannon's Demon Explainer - by Justin
RPC Article re Rebalancings: Does threshold rebalancing work with leveraged funds?
RPC Portfolios: Overview of the RPC Portfolios - by Justin
RPC Subscription Link: Risk Parity Chronicles | Justin | Substack
Breathless Unedited AI-Bot Summary:
Ever wondered how managed futures work and why they're becoming increasingly popular in diversified portfolios? This episode delivers a comprehensive explanation of these powerful but often misunderstood investment vehicles.
Managed futures use trend-following strategies (academically called "time series momentum") to profit from price movements across commodities, currencies, interest rates, and equity indexes. Dating back to the 1960s, these strategies challenge efficient market theory by capitalizing on the observation that when prices start moving in a direction, they often continue that trajectory for extended periods.
What makes managed futures particularly valuable is their complete lack of correlation with traditional assets like stocks and bonds, combined with their positive skew. Unlike stocks that "go up the stairs and down the elevator," managed futures typically deliver modest returns during normal markets but can produce extraordinary gains during extreme market environments - precisely when conventional investments struggle most. This unique return profile was on full display in 2022 when many managed futures funds gained 20-30% while both stocks and bonds suffered.
The democratization of managed futures through ETFs like DBMF, KMLM, and newer offerings from Fidelity and BlackRock has made these institutional-quality strategies accessible to everyday investors at reasonable costs. DBMF, in particular, uses an innovative replication approach to match the performance of the Société Générale CTA Index, functioning somewhat like a Vanguard for the managed futures space.
We also discuss why international bond funds make less effective diversifiers than managed futures, share exciting news about the return of Risk Parity Chronicles blog, and review the performance of our eight sample portfolios.
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