Managed futures: how CTA trend following works, its record and the ETFs

In 2022 the S&P 500 fell 18.11% and a mix of 60% US stocks and 40% US bonds lost 15.79%. Over the same twelve months the SG Trend Index, which tracks ten of the largest trend-following funds, returned 27.35%. The funds in that index trade futures contracts, long in markets that have been rising and short in markets that have been falling.

Managed futures is an investment strategy in which a professional manager trades a diversified portfolio of futures and currency forward contracts, long and short, on stock indexes, government bonds, interest rates, currencies and commodities. In the United States the manager is called a commodity trading advisor (CTA). A simple trend-following model tracks the returns of managed futures indexes and of the largest funds closely, and the terms managed futures, CTA and trend following are often used interchangeably.

Commodity trading advisors, commodity pool operators and the futures they trade

Two registered roles sit behind a managed futures fund. A commodity trading advisor is a person or firm that, for pay, advises others on trading futures, options on futures, retail forex contracts or swaps. A commodity pool operator (CPO) runs a commodity pool, a vehicle that combines money from several investors to trade those same contracts, and solicits the money for it. A managed futures fund is a commodity pool. The CPO runs the fund, and the trading decisions come either from the same firm or from an outside CTA. For the KraneShares Mount Lucas Managed Futures Index Strategy ETF, Krane is the registered CPO and Mount Lucas the registered CTA.

The first public futures fund of this kind, Futures, Inc., was started in 1949 by Richard Donchian, who also built one of the first systematic trend-timing methods. The markets traded today fall into four groups:

• Stock index futures, such as S&P 500 and Russell 2000 contracts.
• Interest rate and bond futures, such as US Treasury note and bond contracts.
• Currency futures and forwards, such as the euro, the British pound and the yen.
• Commodity futures, such as crude oil, gold, soybeans, coffee and sugar.

Despite the job title, CTAs trade mainly financial futures, because stock index and interest rate contracts are the most liquid and cost the least to trade.

A futures position needs only a margin deposit, a fraction of the contract's face value, so most of a fund's money sits in cash. The iMGP DBi Managed Futures Strategy ETF (DBMF) keeps a large portion of its portfolio in US Treasury securities and agency notes with maturities of two years or less, used as collateral. A managed futures return therefore has two parts: the interest on that collateral, and the gain or loss on the futures. Three-month Treasury bills returned 4.18% in 2025, a rough guide to what cash collateral earned that year.

How a trend-following signal decides long or short

The academic name for the signal is time series momentum: a market's own past return predicts its next return. Across 58 futures and forward contracts on equity indexes, currencies, commodities and government bonds, the past 12-month excess return of every contract was a positive predictor of its future return. The effect lasted about a year and then partly reversed. Time series momentum compares a market with its own history. The momentum factor used in stock selection compares securities with each other, as described in our guide to factor investing.

Older systems worked on breakouts, buying a market once it reached a set high and selling once it reached a set low. Current models mostly measure returns over several lookback windows. In AQR's 2017 simulation of trend following since 1880, each month the model:

1. measured each market's excess return over the past 1, 3 and 12 months,
2. went long where that return was positive and short where it was negative,
3. sized each position to carry the same expected volatility,
4. scaled the whole portfolio to a 10% annual volatility target.

The futures adviser to the Simplify Managed Futures Strategy ETF positions each contract long when it shows a positive price trend, and it may go short on a negative trend, based on relative and absolute momentum over several lookback periods.

In a hypothetical case, crude oil futures have returned 15% more than Treasury bills over twelve months and 10-year Treasury note futures have returned 6% less. The model is long oil and short Treasury notes. If oil keeps rising and yields keep climbing, both positions gain. If both markets reverse in the same week, both lose, and the model does not reverse its positions until the lookback returns change sign.

Volatility targeting and position sizing

Futures markets move at very different speeds, so managers size positions by risk. Suppose natural gas futures swing 60% a year and 10-year Treasury note futures 6% a year. Giving each the same risk means holding about ten times as much face value in Treasury notes as in natural gas. Each position's size is recalculated as its volatility changes, so a market that turns turbulent is cut back automatically.

At the portfolio level, DBMF's sub-adviser aims for annual volatility of 8% to 10%, and the AQR simulation targeted 10%. Reaching a set volatility with low-volatility contracts such as short-term interest rate futures can require total face value well above the fund's net assets, and DBMF limits its gross notional exposure to the most volatile contracts.

Crisis alpha: managed futures in 2008 and other bear markets

Managers call gains made during stock market sell-offs crisis alpha. In 2008 the Barclay CTA Index gained 14.09%, while the S&P 500 lost 37.01% and the HFRI Fund of Funds Composite Index lost 21.39%. In 2009, as stocks rebounded 25.30%, the same CTA index lost 0.12%.

Built on 67 markets back to 1880, with hand-collected Chicago Board of Trade prices for the early commodity data, the AQR simulation had positive returns in every decade through 2016. In the 10 largest drawdowns of a US 60/40 portfolio over those 137 years, the strategy made money in 8.

The simulated strategy had drawdowns of up to 25% that lasted long periods, and its worst losses came when several markets reversed sharply at once.

Managed futures returns from 2022 to 2025

The table sets the two main CTA indexes beside DBMF, a fund that tries to track the largest CTAs. Index returns are net of the underlying managers' fees and before any fund fee.

Over the ten years to December 2025 the SG Trend Index returned 3.67% a year, against 2.18% a year for three-month Treasury bills, and over five years it returned 6.98% a year against 3.17% for bills. The SG CTA Index returned 4.73% a year over the same five years.

Single funds swung harder than the indexes. DBMF's worst quarter was the first quarter of 2023, at -9.31%. The KraneShares Mount Lucas ETF (KMLM) had its best quarter in the first quarter of 2022, up 18.95%, and its worst in the fourth quarter of 2023, down 11.32%. The Virtus AlphaSimplex Managed Futures Strategy Fund lost 11.11% in the second quarter of 2025 alone. In 2026 DBMF was up 13.06% for the year on September 28, and KMLM was up 14.58% at the end of August.

How the SG CTA and SG Trend indexes are built

Société Générale's Prime Services business calculates both indexes. Neither can be bought directly.

SG CTA Index

The 20 largest CTAs by assets that trade mainly futures, are broadly diversified, are open to new money and report daily returns net of fees. Equal-weighted, rebalanced and reconstituted every January 1, with history back to January 2000. Its 2026 members include Man AHL, Transtrend, Winton, Aspect, Lynx, AQR and PIMCO, and the list includes macro programs such as Graham's Quant Macro alongside trend followers.

SG Trend Index

The 10 largest managers recognized as trend followers, which must also show significant correlation with trend-following peers. Same equal weighting, annual reset and daily net-of-fee calculation.

Fund prospectuses also use two other benchmarks: the Credit Suisse Managed Futures Liquid Index, a rules-based index that lost 4.04% in 2025, and the KFA MLM Index, which lost 1.69%.

Fees, and how much of the return investors kept

A 2% management fee and a 20% performance fee have been the typical hedge fund charge, and the AQR simulation deducted both from its returns. Our guide to hedge fund fees shows how the two charges are calculated.

From 1994 to 2007, CTA returns to investors averaged 0.85% a year above US Treasury bills after fees, a figure not statistically different from zero, while the estimated return before fees was 5.4% a year above bills, so fees absorbed most of the performance. Even before fees, the CTAs in that sample earned no excess return over simple futures strategies available in the public domain. The ETFs in the fund table below charge between 0.75% and 0.90% a year, with no performance fee.

How the CFTC and NFA regulate CTAs and CPOs

The Commodity Futures Trading Commission was created in 1974 and in 1984 delegated the registration of CTAs and CPOs to the National Futures Association. A firm registers by filing Form 7-R and paying a 200 dollar fee. Each principal and associated person files Form 8-R and fingerprints and must meet NFA proficiency requirements. Registered CPOs, and CTAs that manage client accounts, must also be NFA members.

Managed futures ETFs trade beyond the Rule 4.5 limits, so their advisers register as CPOs and the funds follow both CFTC rules and the rules for registered investment companies. KMLM and its subsidiary, for example, are commodity pools under CFTC rules. The first half of the Rule 4.7 test is covered in our guide to accredited investor status. Any CTA or CPO's registration history, and any disciplinary action, can be checked in NFA's BASIC database.

Managed futures ETFs and mutual funds

The funds below are registered investment companies open to any investor for the price of one share or the fund minimum. Expense ratios come from each fund's latest summary prospectus, except ASMF's, which comes from the issuer's website. Net assets are as of September 28, 2026, from the issuers' websites.

In 2025 AQMIX returned 14.63% and DBMF 13.85%, while KMLM lost 3.21% and ASFYX lost 9.67%, in a year when the SG CTA Index was flat. The funds differ in the markets they trade, the lookback of their signals and their volatility targets, and KMLM holds no stock index futures at all.

This article is general information, not investment advice. Our guide on investing in hedge funds with little money compares these funds with other registered routes into hedge fund strategies, and our ETF and mutual fund comparison covers the structural differences.

What the DBMF prospectus says about its fees, subsidiary and benchmark

The April 30, 2026 summary prospectus lists a 0.85% management fee, 0.00% of other expenses and an inactive 12b-1 plan, for total annual operating expenses of 0.85%. On a 10,000 dollar holding with a 5% yearly return, that comes to 87 dollars after one year and 1,049 dollars over ten. The sub-adviser is Dynamic Beta investments, and Andrew Beer and Mathias Mamou-Mani have managed the fund since 2019.

• Commodities through a subsidiary. Up to 20% of total assets can go into a wholly owned Cayman Islands subsidiary that holds the commodity futures.
• No discretion. Positions come from the Dynamic Beta Engine alone, and the sub-adviser cannot override it.
• Benchmark. Since April 29, 2024 the primary benchmark has been the Bloomberg US Aggregate Bond Index, with the SG CTA Index as secondary benchmark.
• Tax reporting. Shareholders receive a Form 1099, with ordinary income paid quarterly and capital gains once a year.

From its May 2019 start to December 2025 the fund returned 8.28% a year before taxes, against 4.44% a year for the SG CTA Index over the same period.

Replication and direct trend following

A replication fund estimates what the big CTAs hold from their recent returns and copies that exposure with a small set of liquid futures. DBMF's model reads the trailing 60 days of returns of a pool of the largest CTAs and rebuilds their estimated asset allocation, using only contracts traded on US exchanges. It sees returns only, so it follows a turn in the managers' positioning with a lag. The model targets the managers' performance before their fees, and the fund charges 0.85%.

A direct trend fund runs its own signals on its own list of markets. AQMIX, ASFYX, ISMF and CTA work this way, and KMLM follows a published index with fixed rules.

How managed futures are taxed: section 1256, K-1 and 1099

Regulated futures contracts, foreign currency contracts and several kinds of options are section 1256 contracts. Under section 1256 of the Internal Revenue Code, any position still open at year end is treated as sold at its fair market value on the last business day, and every gain or loss counts as 60% long-term and 40% short-term capital gain or loss, however long the contract was held. Individuals report these amounts on Form 6781. An individual with a net section 1256 loss can elect to carry it back three years against earlier section 1256 gains.

How that reaches an investor depends on the fund's legal form.

Partnership commodity pools

A commodity pool organized as a limited partnership passes its results through on a Schedule K-1, with net section 1256 gains in box 11, code C, and each partner owes tax on their share of the income whether or not any cash was distributed.

ETFs and mutual funds

The registered funds in the table are taxed as regulated investment companies and report on Form 1099. The section 1256 rules apply at the fund level, and shareholders receive ordinary income and capital gain distributions. To hold commodity futures within the regulated investment company rules, they use a Cayman Islands subsidiary, which the tax code caps at 25% of total assets at each quarter end.

In DBMF's 2025 figures, the 13.85% pretax return fell to 11.14% after taxes on distributions and to 8.14% after taxes on distributions and a sale of the shares, at the highest federal rates.

Managed futures alongside a 60/40 portfolio

A 60/40 portfolio relies on bonds to offset stock losses. In 2022 both halves fell together while the SG Trend Index rose 27.35%. In the AQR simulation, trend following also did best in the years when US stocks rose or fell most sharply.

From 2023 through 2025 the FT Wilshire 5000 Index of US stocks returned 26.10%, 23.76% and 17.13%. The SG Trend Index returned about 0.7% over the three years combined, less than three-month Treasury bills paid in 2025 alone. In 2025 funds carrying the same managed futures label also ended the year 24 percentage points apart, from AQMIX at 14.63% to ASFYX at -9.67%.

Frequently asked questions

What are managed futures in simple terms?

A managed futures fund pays a professional manager, called a commodity trading advisor, to trade futures and currency forward contracts on stock indexes, bonds, interest rates, currencies and commodities. Most of these managers follow price trends with computer models: they buy contracts on markets that have been rising and sell short contracts on markets that have been falling, then resize the positions as volatility changes.

What is the expense ratio of DBMF?

The iMGP DBi Managed Futures Strategy ETF charges 0.85% a year. Its April 30, 2026 summary prospectus lists a 0.85% management fee, 0.00% of other expenses and no active 12b-1 fee, which works out to 87 dollars in the first year on a 10,000 dollar holding under the prospectus example. Brokerage commissions and bid-ask spreads come on top.

Are managed futures risky?

They carry the risks of leveraged futures trading. The SG Trend Index lost 4.17% in 2023, and single funds fell much further in some quarters: DBMF lost 9.31% in the first quarter of 2023, KMLM 11.32% in the fourth quarter of 2023 and the Virtus AlphaSimplex Managed Futures Strategy Fund 11.11% in the second quarter of 2025. A century-long trend-following simulation published in 2017 had drawdowns of up to 25%.

What is the difference between managed futures and commodities trading?

A commodity fund usually holds long positions in raw materials such as oil, metals and grains. A managed futures fund trades futures on stock indexes, bonds and currencies as well as commodities, and it goes short as readily as long. Most of the largest commodity trading advisors trade mainly financial futures, because those markets are the most liquid.

What is the best managed futures ETF?

Rankings change from year to year: DBMF lost 8.72% in 2023 and gained 13.85% in 2025. In 2025 the funds listed in this article returned between 14.63% (AQR Managed Futures Strategy Fund, Class I) and minus 9.67% (Virtus AlphaSimplex Managed Futures Strategy Fund, Class I), while the SG CTA Index was roughly flat. Expense ratios on the ETFs run from 0.75% to 0.90%. Each prospectus sets out the method, the fees and the tax treatment.

Do managed futures ETFs issue a K-1?

The ETFs covered here are registered investment companies and report to shareholders on Form 1099. DBMF reports on Form 1099, and Simplify's CTA fund issues no Schedule K-1. Commodity pools organized as partnerships, such as private funds set up as limited partnerships, send partners a Schedule K-1 that reports section 1256 gains in box 11, code C.