Using the work of Zvi Bodie, Lintner, Orr, Irwin and Brorsen, Irwin and Diego

Landa and Elton, Gruber and Rentzler, which covered data drawn from 1950 to 1987, Peters found a clear affirmative to this question.

The answer is clearly ‘yes’ . . . all of the research results except one found that futures, and managed futures, performed better during periods of inflation. This confirms the theoretical idea that inflation (and possibly deflation) should lead to patterns in futures prices, which should benefit trend-following CTAs who make up the majority of trading advisors. A caveat: managed futures were still in early infancy during the last period of sustained inflation (1979-1981), so these empirical results should be viewed with some caution.

Are Returns from Managed Futures Correlated with Those on Stocks and Bonds?

Peters found that none of the researchers whose work he was looking at had found any significant positive correlation between managed futures and stocks and bonds. Lintner found little or no correlation, as outlined above. Orr, studying the monthly returns for the Mar Futures Pool Index against the S&P 500 and the Salomon Bros. high-grade corporate bond index from 1980 to 1986, found slightly negative correlation between 1980 and 1983 and a slightly positive correlation between 1984 and 1986.

Irwin and Brorsen looked at the returns for 84 public futures funds and compared them with the S&P 500 and long term (20-year) US treasury bonds and found strong negative correlations between 1975 and 1984 on a quarterly basis.

Baratz and Eresian took the returns from 12 CTAs and compared them with the S&P 500 and US treasury bonds, using a weighted average of all bonds with maturities of 10 years or more, and found that between 1980 and 1985 there was little or no correlation. (Interestingly, Baratz and Eresian repeated the exercise roughly five years later, looking at returns from January 1984 through to December 1988 and found that the results were quite different. Through this time period, they found that in order to increase yield while maintaining a constant level of risk, more than half the portfolio, 52 per cent, had to be allocated to futures.)

Irwin and Landa studied the annual returns over a 10-year period from 1975 to 1985 from all actively traded public commodity funds compared with the S&P 500 and long-term (20-year) US treasury bonds and found strong negative correlation.

Elton, Gruber and Rentzler found no correlation between the returns from public commodity funds compared with the S&P 500, long-term government bonds, long term corporate bonds and small stocks.

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