Achieving consistent outperformance in public markets is one of the greatest challenges faced by financial advisors. The SPIVA Scorecard consistently shows that the vast majority of active equity managers fail to outperform their benchmarks over the long term. According to the 2023 SPIVA U.S. Scorecard, over 90% of large-cap equity funds underperformed the S&P 500 over a 20-year period. Similarly, Morningstar’s Active/Passive Barometer has repeatedly highlighted that very few managers persistently generate excess returns.

Given the difficulty of finding persistent alpha through security selection, advisors need alternative approaches to enhance portfolio returns. Return stacking – adding managed futures on top of a traditional equity allocation – offers an alternative approach to pursuing outperformance. By leveraging the benefits of capital-efficient instruments, investors can access multiple sources of return while maintaining full equity exposure.

Consider a return stacked® portfolio that seeks to provide $1 of exposure to equities plus $1 of exposure to managed futures for every $1 invested. Unlike traditional attempts at outperformance, which rely on stock-picking or timing the market, the return stacking strategy provides an additional return stream through systematic trend-following strategies, commonly found in managed futures.

For example, instead of allocating 80% to equities and 20% to managed futures, an investor can maintain a 100% equity allocation while adding a full 100% overlay of managed futures. This approach ensures that the investor does not have to sacrifice equity beta to introduce an alternative return source.

1. The Challenge of Finding Traditional Alpha: Active managers struggle to beat benchmarks, and when they do, success rarely persists. By contrast, systematic strategies like managed futures have historically demonstrated resilience and the ability to generate uncorrelated returns over time.
2. Capital Efficiency Without Reducing Equity Exposure: Unlike traditional alternatives that require reducing stock (or bond) holdings to make room in a portfolio, return stacking may allow advisors to enhance portfolios without sacrificing upside potential from equities.
3. Historical Outperformance During Crisis Periods: Managed futures strategies have historically demonstrated positive returns during major equity downturns because they capitalize on sustained trends – whether in equities, interest rates, or commodities. This has allowed them to generate positive returns during periods when equities suffered significant losses, making them a strong candidate for inclusion in portfolios seeking long-term outperformance.

Return stacking can be implemented using capital-efficient vehicles such as ETFs or mutual funds that provide exposure to both equities and managed futures within a single allocation. These funds use a combination of futures contracts and collateralized investments to achieve notional exposure beyond 100% of an investor’s capital.

For example, a return stacked® strategy may hold:

• 100% exposure to U.S. large-cap equities via underlying equities or index futures.
• 100% exposure to a diversified managed futures strategy through trend-following futures contracts.
• A liquidity reserve consisting of short-term U.S. Treasuries or cash equivalents to manage margin requirements.

Unlike alternative strategies that depend on specific market conditions, managed futures have demonstrated an ability to generate returns in both bull and bear markets.

Key Characteristics of Managed Futures:

• Uncorrelated Returns: Trend-following strategies often perform independently of stock and bond markets.
• Global Exposure: Managed futures can take long and short positions across equities, bonds, currencies, and commodities.
• Crisis Alpha: Historically, managed futures have delivered positive returns during market drawdowns.