Our partners at Mount Lucas, the sub-advisor to the KraneShares Mount Lucas Managed Futures Index Strategy ETF (Ticker: KMLM), engage with various investors—domestic and international, institutional and retail, alternatives-focused and equity-centric. According to Mount Lucas, these investors typically have multiple questions and concerns driving their current thinking. However, in recent weeks, this has coalesced into a seemingly more singular focus around the return of President Trump. Upon closer inspection, this focus is more of a Rorschach test for where investors believe the economy may be headed.

For macroeconomic topics like inflation or growth, Mount Lucas typically observes a fairly narrow range of opinions—around 10-15% of people expecting slightly lower inflation, 10-15% anticipating it to be a bit higher, with most clustered near the Fed's official target, expecting the status quo. Currently, not a single person thinks the economy is in a state of equilibrium. On one side, 50% believe runaway inflation is on the horizon, fueled by exploding deficits, Federal Reserve pressure, eroding confidence in the USD, and soaring commodity prices due to global turmoil. The other 50% foresee a deflationary crisis, driven by the deportation of 10 million immigrants, a $2 trillion reduction in the federal budget, and a rampant USD disrupting emerging markets and driving commodity prices downward. Adding to this uncertainty, President Trump, the world’s largest one-man volatility machine, has teamed up with perhaps the only person who could rival him, Elon Musk. Volatility squared.

These factors, among others, have realigned market assumptions, significantly increasing the likelihood of problematic inflation or deflation over the next twelve months. Investors face a FLATION complication.

Successful portfolios account for this when evaluating current asset allocations. Managed futures might be the only investment strategy that has thrived in both of these scenarios, thanks to its ability to go long and short on commodities, currencies, and global bonds. Historically, adding managed futures to traditional stocks and bonds has increased a portfolio’s annualized return and lowered its standard deviation.¹ KMLM exemplifies this strategy by tracking a diversified set of global futures contracts across commodities, currencies, and bonds.* It offers investors an accessible way to incorporate managed futures into their portfolios, leveraging the same trends that historically enhance returns and reduce portfolio volatility. Importantly, it is completely detached from the emotional aspects of analysis, which is crucial in volatile and tense times. No value judgments here—it plays the hand it is dealt. A powerful diversifier for uncertain times.

Let’s dig deeper…

For the first set of fears—runaway inflation, exploding deficits, a collapsing dollar, and high commodity prices—trend strategies would likely be shorting the long end of the bond market, shorting the USD against major currencies, and holding long positions in hard assets like gold and crude oil.

For deflationary disaster fears—trend strategies would likely be long on the USD, short on commodities such as copper and oil due to declining global demand, and long on bonds as rates return to lower bounds.

Mount Lucas has always believed that portfolios are generally overexposed to the current state of the world. Equity and credit markets usually favor stability. If investors are unsure how things will unfold, they should consider the investment approaches and tools in their portfolio. Managed Futures strategies like KMLM provide exposure to shifts in the world that you can’t easily predict or access, as many portfolios are long-only and lack the tools to engage in currency and commodity markets. With credit spreads tight and equity markets at relatively high valuations, adding some diversification and exposure to significant moves seems prudent.*

*Diversification does not ensure a profit or guarantee against a loss.

Citation:

1. Data from Bloomberg and Mount Lucas from 1/1/1988 to 9/30/2024. Click here to view.