In 2007, Philip Moses, a Raymond James financial advisor at First Federal Bank of Florida in Lake City, Fla., had a local physician as a client who wanted to diversify his $1.5 million portfolio. Moses, long an advocate of alternative investment strategies, suggested a hefty 20% allocation to alternatives, including structured products, a multi-strategy hedge fund and a multi-advisor managed futures fund. It proved a timely move. When equities and debt markets crashed a year later, the client's alternative holdings "held up, just like they were supposed to," says Moses. Among them, the top performer was a 5% stake ($75,000) in a managed futures fund. "It moved up smartly as everything else was going down," says Moses.

It's easy to embrace managed futures after 2008, when as a class they showed a 20% gain while markets lost nearly 40%. They are one of the only investments that did well last year, in part because they are truly not correlated with stocks and bonds. This year, however, the sales pitch is a little harder. Since hitting a low on March 9, the S&P 500 recovered almost 50% of lost ground by the end of August. Meanwhile, managed futures as a group have been down an average of 6% in the same period. Insiders are reportedly selling, and some formerly bullish strategists are claiming that the markets may be running out of steam. The question: Is this still a good time to invest in managed futures? Moses thinks so, for diversification purposes if nothing else. "We're opening managed futures accounts for clients as fast as we can explain the strategy to people," he says.

TREND FOLLOWERS

Others agree. Despite their current performance, managed futures aren't failing us, says Chris Butler, vice president for alternative investments at Raymond James in St. Petersburg, Fla. They're doing just what they are supposed to do, which is to be noncorrelating assets—that is, instead of moving in inverse relationship to markets, they march to their own drummer, going up when markets go down, or sometimes even going up as stock and bond markets go up. "Managed futures involve trading long and short, using a trend-following approach—often very mathematical," Butler says.

According to Barclay Hedge, an Iowa-based firm that tracks alternative investments, managed futures since 1980 have had a zero correlation with the S&P Index, a 0.14 correlation with U.S. bonds, and a 0.16 correlation with global bonds. Brian Kim, president and chief investment officer of Liquid Capital Management, a New York-based hedge fund, explains, "As a class, the bulk of CTAs [commodities trading advisors who are licensed by the Commodity Futures Trading Commission] who run managed futures programs are trend followers. So if there is a market trend—down or up—they can do well. They tend to do worse during a shift from one market trend to another."

That doesn't mean that investors should avoid managed futures or try to buy them when they're down. "You don't want to pull away your money from a CTA because he had a bad quarter or two, or invest in one because he's down," he says. "What you're looking for is long-term, non-correlating performance."

Bob Franklin, senior vice president and director of distribution of alternative investments at Wells Fargo in San Francisco, Calif., says advisors need to explain to clients that managed futures are a long-term investment. "Intra-month, managed futures can be wildly volatile," he cautions. "Plus 10% or minus 10% in a month is not at all unusual, and typically you get hit during market reversals, which is what has happened this year. But market reversals tend to be short-lived, and longer term, managed futures have done well." He notes that from 1998 to 2008, there were four down years for the S&P 500, ranging from -0.9% to -37%. During the same period, managed futures, as a class, had only one down year, and that was just -1.9% in 1999. Moreover in each of the six most severe market drops since 1980, managed futures as a group showed annual gains.

PAYING FOR TALENT

Managed futures using a long/short investment strategy represent an idea that's been around since the 1940s, says Chris Geczy, a university of Pennsylvania finance professor and academic director of the Wharton School's Wealth Management Initiative. "They were alternative investments before it was cool to be alternative. Empirically, managed futures add value to a portfolio because they are non-correlated to equities, banks and even traditional hedge funds."

Over $200 billion has been invested in managed futures strategies to date, an amount that keeps growing, but Ben Alpert, a hedge fund analyst at Morningstar, says there are very few mutual funds that feature a managed futures strategy. "It's still a niche area with too few products for us to compare them, much less do any robust analysis or make recommendations," he says.