CHAPTER 23 Time Diversification: The Case of Managed Futures. There is a long-standing debate in the financial literature as to whether stocks are more risky over the long term than over the short term. In this chapter, we use an approach based on historical data and analyze the ex-post performance of managed futures over different time periods. | 23 Time Diversification The Case of Managed Futures François-Serge Lhabitant and Andrew Green There is a long-standing debate in the financial literature as to whether stocks are more risky over the long term than over the short term. In this chapter we use an approach based on historical data and analyze the ex-post performance of managed futures over different time periods. We observe that in terms of capital preservation managed futures seem less risky over the long term than over the short term. However this superiority is at risk as soon as the benchmark return increases. This fact combined with the correlation properties of managed futures with traditional asset classes tends to promote their use as portfolio diversifiers rather than as stand-alone investments. INTRODUCTION Adam and Eve as originally created were biologically capable of living forever. Unfortunately eating the forbidden fruit forced them to realize that aging also could mean a process of decay that leads finally to death. Several expressions vita brevis life is short sic transit gloria mundi thus passes away the glory of the world carpe diem seize the day tempus fugit time flies remind us of time s inevitability as well as men s foolish attempts to transcend it or at least find an antidote to it. To our knowledge the only field where the passage of time actually may provide growth rather than decay is the investment arena particularly when one takes into account the power of compounding. The latter simply means earning interest on interest a principle that Einstein used to describe as being the most powerful force in the universe and the ninth wonder of the world. Its consequences are straightforward The longer you stay invested and reinvest your earnings the faster your money will grow. The key is therefore to be patient and let time do the work for you. 385 386 PROGRAM EVALUATION SELECTION AND RETURNS The power of compounding is universally recognized. Another important theory linked to the
