Which factor has most limited the diversification benefits of managed futures in portfolios?

Which factor has most limited the diversification benefits of managed futures in portfolios?

• A. Low turnover
• B. Low correlations
• C. High fees
• D. High correlations

Answer: (C)

Diversification from managed futures comes from their tendency to move differently than traditional stocks and bonds, which can reduce overall portfolio risk without necessarily sacrificing return. The practical value of that diversification, however, depends a lot on what you pay to access it. High fees erode the net return and can negate the risk-reducing benefits of adding managed futures. Even if the strategy offers favorable diversification in theory, the expense burden can make the overall portfolio less efficient, so the observed diversification benefit is much smaller after costs. By comparison, low turnover mostly affects trading costs but doesn’t inherently limit diversification; low correlations actually enhance diversification; and high correlations reduce diversification, but that is a market characteristic and typically less within the control of the portfolio implementation than fees. Thus, the cost impact of high fees is the most limiting factor in practice.

Diversification from managed futures comes from their tendency to move differently than traditional stocks and bonds, which can reduce overall portfolio risk without necessarily sacrificing return. The practical value of that diversification, however, depends a lot on what you pay to access it. High fees erode the net return and can negate the risk-reducing benefits of adding managed futures. Even if the strategy offers favorable diversification in theory, the expense burden can make the overall portfolio less efficient, so the observed diversification benefit is much smaller after costs.

By comparison, low turnover mostly affects trading costs but doesn’t inherently limit diversification; low correlations actually enhance diversification; and high correlations reduce diversification, but that is a market characteristic and typically less within the control of the portfolio implementation than fees. Thus, the cost impact of high fees is the most limiting factor in practice.