Managed futures

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Managed futures are accounts similar to mutual funds, but a portfolio is composed of government securities, futures contracts and options on futures contracts.

The industry comprises professional money managers who manage assets on behalf of their clients. These money managers are also known as Commodity Trading Advisors (CTAs). Using the global futures markets, they implement their systems to take positions based on expected profit potential. As an asset class, managed futures can be used as an investment alternative that may potentially enhance the returns and lower the overall volatility of a diversified investment portfolio.

According to the Chicago Board of Trade, in 2002 an estimated $45 billion was under management by trading advisors. Just two years later in a study released by the Barclay Group, money under management during the 4th quarter 2004 had grown to $131.9 billion. Today, in 2007, that total is nearing $180 billion.

A release from GARP, which appeared in January 2008 reported that according to institutionalinvestor.com, "it is London and continental Europe that has begun to dominate the managed futures landscape. Financial Times says that the North American market share for the funds has lowered rather significantly from 74 percent in 2001, to 54 percent currently, BarclayHedge says. The hefty drop comes amidst even as US assets in the sector have reportedly tripled."[1]

Markets and Diversification

Managed futures are a diversified investment opportunity encompassing a large number of commodities, more than 150 different markets worldwide. Additional diversification benefits are achieved by using multiple trading strategies or advisors that have proven their superior trading techniques over time. Defining these benefits helps to explain how managed futures can be utilized to achieve a variety of investment goals and objecives for portfolio diversification.

The stated primary benefit of adding an allocation of managed futures to a diversified investment portfolio is that it may decrease overall portfolio volatility risk. The potential to reduce risk is possible due to the low to slightly negative correlation of managed futures to traditional asset classes, such as stocks and bonds.

One of the key tenets of Modern Portfolio Theory, as developed by Nobel Prize economist Dr. Harry Markowitz, is that more efficient investment portfolios can be created by diversifying among asset classes with low to negative correlations. Managed futures investments have historically performed independently of traditional investments, such as stocks and bonds. This is referred to as non-correlation or the potential for managed futures to perform well regardless of whether traditional markets such as stocks and bonds are rising or falling. The non-correlation of managed futures with traditional asset classes allows portfolio volatility to be reduced by their inclusion in an overall balanced investment portfolio. While there exists a common misconception that futures are highly volatile and risky, adding managed futures as a component to a diversified investment portfolio may actually decrease volatility and increase returns in a portfolio as a whole.[2]:

CTA411 lists the following key benefits of managed futures:

  • Non-correlation to traditional assets
  • Potential for enhanced portfolio returns
  • Opportunity for reduced portfolio volatility risk
  • Opportunities in both bull and bear markets
  • Ability to profit independent of the economic environment
  • Can be employed as an inflation or deflation hedge
  • Provides global diversification into array of liquid markets
  • Managed Futures industry is stable and transparent
  • Potential tax benefits managed futures versus stocks

References

  1. "January 7:Industry Risk - US Managed Futures Market Beginning to Decline Sharply”. GARP.
  2. "New Website Explains Benefits of Managed Futures” - 10/24/07. http://www.sbwire.com.

See Also