Managed Futures and Volatility: Decoupling a “Convex” Relationship with Volatility Cycles

INTRODUCTION 2011 was a period fraught with turbulence in financial markets. Managed Futures strategies, despite their common association with long volatility, did not fare as well as some might have expected amidst this turbulence. A closer look at volatility, what it means to be long or short volatility, and Managed Futures performance across different regimes in volatility can provide insights into the strategy’s complex or “convex” relationship with volatility. A closer look at the cycles of volatility demonstrates that Managed Futures is able to capture “crisis alpha” for investors over negative volatility cycles, while in certain turbulent periods they also face some of the same “short volatility” risks that plague many hedge fund strategies.