Jason Gerlach, Rick Slaughter, Chris Stanton
Sunrise Capital Partners
In November 2002, Cass Business School Professor Harry M. Kat, Ph.D. began to circulate a working paper entitled “Managed Futures and Hedge Funds: A Match Made in Heaven.” The Journal of Investment Management subsequently published the paper in the First Quarter of 2004. We consider Dr. Kat’s paper to be one of the seminal works in the tactical macro investing or “managed futures” space. In the paper, Kat noted that while adding hedge fund exposure to traditional portfolios of stocks and bonds increased returns and reduced volatility, it also produced an undesirable side effect—increased tail risk (lower skew and higher kurtosis). He went on to analyze the effect of adding managed futures to the traditional portfolios, and then of combining hedge funds and managed futures, and finally the effect of adding both hedge funds and managed futures to the traditional portfolios. He found that managed futures were better diversifiers than hedge funds, that managed futures reduced the portfolio’s volatility to a greater degree and more quickly than did hedge funds, and that managed futures achieved this without the negative side effect of increased tail risk. He concluded that the most desirable results were obtained by combining both managed futures and hedge funds with the traditional portfolios.1
Kat’s original period of study was June 1994–May 2001. ...