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Buyer Beware With Managed-Futures Funds

Investors have swiftly rushed into managed-futures funds this year, but the category isn't out of the woods yet.

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After languishing for several years, managed-futures funds bounced back in 2014, with the average fund notching a 9% return. Investors appear to have taken notice, pumping more than $1.4 billion into the category in the first two months of 2015, including a single-month record of $800 million in January.

Performance-chasing aside, there's some reason for enthusiasm. Managed-futures strategies employ an intriguing approach--trend following--that research has shown holds promise in enhancing a portfolio's overall risk-adjusted returns. Unfortunately, though, most of the available managed-futures funds are too pricey, too opaque, or unproven. Indeed, only one of the five distinct managed-futures funds we cover (which together account for about 70% of that Morningstar Category's aggregate assets under management) garners a Positive rating. While the category is showing signs of improvement in transparency and price, for the time being it's appropriate for investors to approach these strategies with a cautious mindset.

Jason Kephart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.