A new white paper on managed futures mutual funds takes aim at Standard & Poor’s Diversified Trends Indicator, a strategy tracked by many asset managers using a passive investment approach.

In the paper, Altegris Investments, Inc., a broker-dealer in La Jolla, Calif., calls the construction methodology used by the DTI “more akin to a simplistic trading strategy than a passive index.”

The paper questions the DTI as a managed futures strategy, arguing that the DTI has significantly underperformed the broader universe of managed futures programs over time when measured against two other indexes: The Barclays BTOP50 Index and its own Altegris 40 Index.

Managed futures have gained popularity recently as an alternative investment that can help investors limit risk. 

Furthermore, the paper argues that managed futures don’t easily lend themselves to passive management: “Managed futures, by definition, are ‘managed.’”

The nuances of each manager and their dynamic trading strategies make it hard to design a true passive index that is representative of the managed futures asset class, Altegris argues.

Altegris and Barclay Hedge, according to the paper, have addressed the problem by creating indices that passively track active managers’ performance. Information from those indexes, according to Altegris, can be used to benchmark individual managed futures strategies.

Altegris' white paper discusses the DTI in the context of managed futures mutual funds. There are three main types of such funds.

Two options use actively managed strategies, while the third uses what are called passively managed strategies. The most prominent of the passive strategies are designed to track the DTI, Altegris notes.

Not surprisingly, S&P takes issue with Altegris’ claims.

Jodie Gunzberg, director of commodity indices at S&P Indices, says the paper “falls short on several points.”

For example, she said, the term “managed” does not necessarily mean what Altegris claims it does. “Managed futures is simply a term that is synonymous with CTA (commodity trading advisor) as described by the regulators,” Gunzberg said.

She also argues that a better representation of the managed futures space for Altegris to consider would have been the recently launched S&P Systematic Global Macro Index, which aims to reflect price trends of highly liquid global futures that represent the general level of volatility taken by managers in the global macro and managed futures/CTA space.

That index, she notes, is diversified globally across 37 constituents within the six most widely traded sectors: commodities, energy, fixed income, foreign exchange, short-term interest rates and equity indices.

Altegris executives were not immediately available to respond to S&P’s defense.