Managed Futures
Managed Futures refers to a subclass of alternative investment vehicles where registered professional money managers, known as commodity trading advisors (CTAs) actively trade futures and options contracts as well as foreign exchange for the accounts of individuals or institutions who retain them.
Since managed futures industry is heavily regulated, they are regarded amongst best alternative investment vehicles that offer hands-off and safe approach to participate in the futures, options and forex markets.
Individual investors’ motivation to participate in managed futures mostly stands up to risk appetite and absolute capital growth.
Institutional investors such as traditional funds, family offices are attracted to managed futures because low correlation between managed futures and stocks/bonds allows for risk diversification and optimization of risk adjusted returns.
Benefits of Managed Futures
Academic and industry research reveal that, managed futures historically have low correlation to traditional asset classes, such as stocks, bonds or even real estate. Thus, allocating a portion of portfolio to managed futures offers diversification opportunities as they enhance risk-adjusted returns and reduce drawdowns and volatility of security-oriented portfolios.
CTAs can exploit opportunities to profit in a variety of economic environments by establishing a short position just as easily as a long position. This flexibility, coupled with their low correlation with most traditional markets, may contribute to better performance versus traditional assets such as stocks and bonds.
Futures markets are very liquid markets allowing quick and easy access to cash. So, Managed futures are regarded as highly liquid instruments compared to other instruments alike, such as mutual funds and ETFs.
Managed Futures industry is subject to strict regulatory requirements which are designed to protect investor against potential fraudulent conduct and abusive practices. Government sponsored regulatory bodies, such as CFTC, NFA, FSA, develop not only rules and regulations intended to protect market integrity, but also enforce CTAs to adopt maximum transparency measures to investors.
CTAs have access to 150 + globally traded futures and options markets of a variety of underlying assets and indices, which grant opportunities for flexibility and risk management.
CTAs are professional money managers, which implement trading styles that range from discretionary approach to fully automated approach. Although past performance is not regarded as a guarantee of future profits, CTAs in general deliver attractive returns over the long term, provided that, they employ sound strategies in investing.
Transaction costs (including brokerage, clearing, regulatory and technology fees) in futures markets are much lower than that of stock markets. Also in Managed Future industry CTAs generally charge 2% management fees and 20% incentive fees (based on high-water-mark) which may vary between 0-2% and 10-30% respectively.
Drawbacks of Managed Futures
As with any other investment, managed futures have the potential for gains as well as substantial risk of loss, and may not be suitable for all investors. Since managed futures are involved with highly leveraged instruments that are riskier than traditional instruments – stocks and bonds – investing in managed futures pose higher risks than simply picking a stock or mutual fund.
In rare cases, experienced CTAs may establish positions in some futures or options markets where buyers and sellers withdraw. In such case, traders can not liquidate positions and be vulnerable to unpleasant price fluctuations.
The success of a trading program largely depends on the money manager’s trading skills and knowledge. If the investment strategy that money manager does not pay off, and lacks prudence, investors may lose substantial amount of money.
Managed futures trading programs involve risks associated with investing in futures and options contracts that are traded in emerging markets where regulatory oversight is not as efficient as in developed markets.
Managed Futures Q&A
The term managed futures describes an industry comprised of professional money managers known as commodity trading advisors (CTAs). These trading advisors manage client assets on a discretionary basis using global futures markets as an investment medium. By broadly diversifying across markets, managed futures may simultaneously profit from price changes in stock indices, currencies, treasury futures, bond futures as well as from various commodity markets. Trading advisors can participate in more than 150 global markets; from grains and gold to currencies and stock indices. Many funds further diversify by using several trading advisors with different trading approaches.
Our managed futures services start with one of our brokers an online meeting session to help you select a CTA or portfolio of CTA’s that best fits with your investing goals and risk tolerance. During the meeting, we will understand your goals and risk tolerance and take you on a “guided tour” of our CTA database. Few days after the first meeting, we provide you with customized recommendations tailored to your personal investor profile. We will show you our entire list of approved CTA’s, their track records and present a portfolio selection giving a full explanation of the strategies used and the risks and potential rewards involved. Our intent is to inform you so that you may make a decision as to whether or not this investment is right for you. Managed futures can be used in several account types including individual, joint, and corporate and partnership accounts. They can also be used in a variety of retirement plans including IRAs, trusts and pensions.
After the account has started trading, we monitor the account daily on behalf of the client. Your futures advisor will receive a daily equity run detailing all your open positions, netting all profits and losses, and showing the exact daily balances in your account. We will be able to guide you through the positions and tell you what the risk and reward benefits are for each position entered. A statement will also be automatically be sent to your chosen mailing address on every single trade. The purchase and sale statement shows the date and price entered, and when you exit the trade, the date, price, net profit or loss on the trade, and your account balance. Furthermore, a summary of all transactions showing their results are sent each month for the entire month’s transactions. Therefore, you will always be provided with a written, detailed report of the transactions and the performance of your account.
This article from the CME Group outlines 10 great reasons to consider adding managed futures to your portfolio including reducing volatility, increasing returns and more.
Read Full Report
This article describes that growth and discusses our “top 5 list” of reasons why investors should be interested in managed futures investments.
Read Full Report
Managed futures have increasingly been positioned as an alternative to traditional hedge funds. Funds and other institutional investors often use hedge fund investments as a way of diversifying their traditional investment portfolios of large market cap stocks and highly rated bonds. One of the reasons hedge funds were an ideal diversification play is that they are active in the futures market. Managed futures have developed in this space to offer a cleaner diversification play for these institutional investors.
Academic Research on Managed Futures
Review academic contributions about managed futures.
Managed Futures Multimedia
Review useful and practical information about Managed Futures, provided by industry experts.