Success of managed futures is a mixed bag

While the stock market plunged about 35 percent, managed futures funds posted annual returns of about 16 percent. That makes them one of the few havens for investors at a time when pensions, retirement savings and even prominent local hedge funds such as Citadel Investment Group have recorded big losses.

But the success of managed futures has also left them vulnerable to client withdrawals. Because market turmoil froze the assets in many portfolios, some institutional and individual investors are pulling money from managed futures. Strong returns mean investors withdraw cash.

People are seeing redemptions even with managers who have been highly profitable, simply because they are the most liquid thing in the portfolio and have the most lenient terms for redemption.

Out of the $1.72 trillion controlled by alternative asset managers, $225.5 billion belong to funds that specialize in managed futures. That represents a 22 percent increase over the past year, a strong showing but not enough to indicate a meaningful influx of new investors.

"While the asset class is growing, it's not growing as much as one might suppose," said the head of one Chicago-based managed futures fund, adding that investors are "using managed futures as an ATM."

Still, more investment dollars could flow into managed futures in 2009.

One reason is that the performance of managed futures tends to be independent of what happens in the stock and bond markets. A key problem for many hedge funds was that their performance often mirrored that of those underlying markets.

Secondly, managed futures trade the highly liquid contracts offered by exchanges. Many other alternative asset funds focus on products traded off an exchange that cannot be easily sold during a panic. People have seen that there is structural stability in managed futures that is not present in hedge fund strategies that hold over-the-counter instruments.

One complication for managed futures is the diversity of managers. Most follow patterns within the market, while others trade short-term and hold their positions for less than three days.

That means the investments seldom involve the same kinds of fundamentals used when evaluating stock prices, a potential obstacle to the segment moving beyond its niche status. And just as managed futures returns are not correlated to the stock markets, returns can vary widely among short-term trader funds.