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Trend-following Managed Futures to Make Retirement Safer?

Posted in Commodity Futures, Strategic Allocation

Should retirement portfolios include an allocation to managed futures? In his October 2017 paper entitled "Using Trend-Following Managed Futures to Increase Expected Withdrawal Rates", Andrew Miller compares seven 30-year retirement scenarios via backtests and modified backtests. Specifically, he compares maximum annual real withdrawal rates as a percentage of initial assets that do not exhaust any 30-year retirement portfolios starting each year during 1926-2012 (SAFEMAX). The seven scenarios, all rebalanced annually, are:

  1. Historical Returns 50-50: uses actual annual returns for a 50% allocation to large-capitalization U.S. stocks and a 50% allocation to intermediate-term U.S. Treasuries.
  2. Historical Returns 50-40-10: same as Scenario 1, except shifts 10% of the Treasuries allocation to a trend-following managed futures strategy that is long and short 67 stocks, bonds, currencies and commodities futures series based on equally weighted 1-month, 3-month and 12-month past returns with a 10% annual volatility target.
  3. Lower Historical Returns 50-50: same as Scenario 1, but reduces monthly returns for stocks and Treasuries by 0.19%, reflecting end-of-2016 valuations.
  4. Lower Historical Returns 50-40-10: same as Scenario 2, but reduces monthly returns for stocks, Treasuries and managed futures by 0.19%.
  5. Lower Managed Futures Sharpe Ratio 50-40-10: same as Scenario 2, but reduces the Sharpe ratio for managed futures from an historical level to 0.5.
  6. Lower Historical Returns/Lower Managed Futures Sharpe Ratio 50-40-10: same as Scenario 4, but reduces Sharpe ratio for managed futures to 0.5.
  7. Historical Returns 50-50 with Trend Following for Stocks: same as Scenario 1, but each month puts the stocks allocation into stocks (30-day U.S. Treasury bills) when the return on stocks is positive (negative) over the prior 12 months.

He ignores all trading frictions, fees and taxes. Using monthly asset class returns as specified and monthly inflation data during January 1926 through December 2012, he finds that:

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