In 1983, Prof. John K. Lintner of Harvard University presented a paper, "The Potential Role of Managed Commodity-Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds," to the Financial Analysts Federation. The paper stated that "the improvements from holding an efficiently-selected portfolio of managed accounts or funds are so large--and the correlation between returns on the futures portfolios and those on the stock and bond portfolio are so surprisingly low (sometimes even negative)--that the return/risk tradeoffs provided by augmented portfolios...clearly dominate the tradeoffs available from portfolio of stocks alone or from portfolios of stocks and bonds."

Using the composite performance of 15 trading advisors, Lintner showed that the return/risk ratio of a portfolio of trading advisors (or futures funds) is higher than a well-diversified stock/bond portfolio. Furthermore, he found a low correlation between the returns of trading advisors and those of stocks, bonds, or a combined stock/bond portfolio. Lintner examined the period July, 1979 through 1982.

Managed Account Reports Follow Up on Dr. Lintner's Study
Managed Account Reports (MAR) is widely recognized by investment professionals as a primary source for Commodity Trading Advisor (CTA) performance statistics. Their performance analysis of CTAs and futures funds are often quoted in such financial publications as Barron's, Wall Street Journal, Forbes, Futures Magazine, and other leading financial publications.

MAR Study
MAR combined a portfolio of managed futures with a (1) portfolio of stocks, (2) a portfolio of bonds, (3) an efficiently-selected portfolio of stocks and bonds, and (4) an efficiently-selected portfolio of stocks, bonds, and treasury bills. Managed futures investments were tested in two ways, through a) futures trading advisors and b) futures funds/pools. MAR conducted the analysis for the period January, 1980 through December, 1992.

First, they evaluated the portfolios to determine if including managed futures increased the risk-adjusted rate of return. Second, they constructed assorted minimum-variance frontiers using combinations of the different asset classes. (A minimum variance frontier is a set of portfolios that provides the lowest standard deviation for a given return of the various combinations.)

Data
As a proxy for the stock portfolio, they used the nominal returns of the S&P 500 Index adjusted for dividends. The S&P 500 index is the dollar-weighted portfolio of 500 large U.S. corporations.

They used the nominal returns on the Lehman Government Bond Index as a proxy for the bond portfolio. This index is a dollar-weighted index of treasury and government-agency bonds with maturities greater than one year.
For managed futures, they first used a portfolio of trading advisors--the MAR Trading Advisor Qualified Universe Index, a dollar-weighted index of trading advisors that MAR tracks currently and has tracked historically. At year-end 1992, 290 trading advisors were in the index. The number of trading advisors in the index fluxtuates each month as new trading advisors meet the qualifications for inclusion or as other trading advisors retire.
Another proxy used for managed futures was a portfolio of futures funds/private pools. Here they used the MAR Fund/Pool Qualified Universe Index, a dollar-weighted index of public funds and private pools that MAR currently tracks or has tracked in the past. At year-end 1992, 452 funds/pools were in the index.¹
For cash, they used the average monthly return on the three-month treasury bill.

Differences With the Lintner Study
A key difference between MAR's study and Lintner's is that Lintner selected 15 advisors and allocated assets efficiently between them. MAR, however, used a qualified universe of 290 advisors. We believe the latter is more representative of the performance of trading advisors as a whole and cannot be criticized as having selection bias. Another important difference is that Lintner looked at the enhanced return per unit of risk. In the MAR study more emphasis was placed on risk-reduction.

Finally, Lintner examined the period July, 1979 through December, 1982. MAR's analysis covered the period January, 1980 to December 1992, a much longer and more recent time period.

Conclusions of MAR Study in Other Securities Combinations with Managed Futures
A.  Managed Futures in a Portfolio of Government Bonds

"An efficiently-allocated portfolio consisting of managed futures and bonds should provide a better reward/risk ratio than an investment in bonds alone." Ideal combination for risk reduction is 91% bonds/9% managed futures.