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.

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This article describes that growth and discusses our “top 5 list” of reasons why investors should be interested in managed futures investments.

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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.

Managed futures evolved out of the Commodity Futures Trading Commission Act, which helped to define the role of commodity trading advisors (CTA) and commodity pool operators (CPO). These professional money managers differed from stock market fund managers because they worked regularly with derivatives in a way most money managers did not.

The Commodity Futures and Trading Commission (CFTC) and the National Futures Association (NFA) regulate CTAs and CPOs, conducting audits and ensuring that they meet quarterly reporting requirements. The heavy regulation of the industry is another reason these investment products have gained favor with institutional investors over hedge funds.

Managed futures can have various weights in stocks and derivative investments. A diversified managed futures account will generally have exposure to a number of markets such as commodities, energy, agriculture, and currency. Most managed futures accounts will have a stated trading program that describes its market approach. Two common approaches are the market-neutral strategy and the trend-following strategy.

Market-neutral strategies look to profit from spreads and arbitrage created by mispricing. Investors who employ this strategy frequently look to mitigate market risk by taking matching long and short positions in a particular industry in an attempt to achieve profit from both increasing and decreasing prices.

Trend-following strategies look to profit by going long or short according to fundamentals and/or technical market signals. When an asset’s price is trending lower, trend traders may decide to enter into a short position on that asset. Conversely, when an asset is trending upward, trend traders may enter into a long position. The goal is to capture gains by analyzing various indicators, determining an asset’s direction, and then executing an appropriate trade.

Investors looking into managed futures can request disclosure documents that will outline the trading strategy, the annualized rate of return, and other performance measures.

Managed futures accounts may be traded using any number of strategies, the most common of which is trend following. Trend following involves buying in markets that are trending higher and selling short in markets that are trending lower. Variations in trend following managers include duration of trend captured (short term, medium term, long term) as well as definition of trend (e.g. what is considered a new high or new low) and the money management/risk management techniques. Other strategies employed by managed futures managers include discretionary strategies, fundamental strategies, option writing, pattern recognition, and arbitrage strategies, among others.[5] However, trend following and variations of trend following are the predominant strategy.

In many managed futures accounts the dollar amount traded is equal to the amount provided by the investor. However, managed futures also allows investors to leverage their investment with the use of notional funding, which is the difference between the amount provided by the investor (funding level) and the mutually agreed upon amount to be traded (trading level).[7] Notional funding allows an investor to put up only a portion of the minimum investment for a managed futures account, usually 25% to 75% of the minimum. For example, to meet a $200,000 minimum for a CTA that allows 50% notional funding, an investor would only need to provide $100,000 to the CTA. The investment would be traded as if it were $200,000, which would result in double the earnings or losses, as well as double the management fee relative to the actual amount invested. As a result, notional funding can add significant risk to managed futures accounts and investors who wish to use such funding are required to sign disclosures to state that they understand the risk involved.

Managed futures accounts are regulated by the U.S. federal government, through the CTAs and CPOs advising the funds. Most all of these entities are required to register with the Commodity Futures Trading Commission and the National Futures Association and follow their regulations on disclosure and reporting.

The 2010 enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act led to increased regulation of the managed futures industry. On January 26, 2011, the CFTC made additions and amendments to the regulation of CPOs and CTAs, including two new forms of data collection. The CFTC also introduced regulation to require greater reporting of data and amend its registration requirements.[14] Under the new amended registration requirement, funds that use swaps or other commodity interests may be defined as commodity pools and as such their operators must register with the CFTC, where previously they did not.[15] On 17 April 2012, the United States Chamber of Commerce and the Investment Company Institute filed a lawsuit against the CFTC, aiming to overturn this change to rules that would require the operators of mutual funds investing in commodities to be registered.

Institutional investors have been investing in Managed Futures since the mid-1980s. Since then, assets under management in Managed Futures programs have grown to $200 Billion. Today, a wide range of investors avail themselves of Managed Futures, from retail to high-net worth to institutional investors.

• Investors
• Individuals
• Family Offices
• Registered Investment Advisors (RIAs)
• Fund of Funds
• Asset Managers
• Public Pension Funds
• Endowments
• Foundations
• Companies
• Corporate Treasury Departments
• Corporate Pension Funds
• Insurance Companies
• Governments
• Central Banks
• Sovereign Wealth Funds

Managed futures are the systematic or discretionary trading of futures contracts by professional Commodity Trading Advisors (CTAs) who trade in global futures and options markets, as either buyers or sellers of contracts representing real assets such as gold, silver, wheat, corn, coffee, sugar and heating oil, as well as financial assets such as government bonds, equity market indices and currencies. The CTA makes all trading decisions on behalf of the client through a revocable power of attorney.

A CTA is a Commodity Trading Advisor. A CTA is an individual or organization which, for compensation or profit, advises others as to the value of or the advisability of buying or selling futures contracts or commodity options. Providing advice indirectly includes exercising trading authority over a customer´s account, as well as giving advice through written publications or other media. For further information on Commodity Trading Advisor please refer to the National Futures Association and the Commodity Futures Trading Commission.

Generally speaking, because managed futures have little correlation to stock and bond markets, it is quite difficult to make a comparison. It may be common practice for investors to dissect the individual elements of their portfolio and expect them to compete with one another over every time period. However, effective and prudent asset allocation would suggest that: Managed futures cannot be looked at in isolation from the rest of the portfolio, nor should they be examined in relation to the stock market. It is very important to ensure investors have a balanced approach to investing, to understand the rationale behind allocating portions of assets to different investment classes, styles or instruments, and that they always keep their long–term goals in mind. Different instruments within their portfolio should complement each other, not compete with each other. It is important to remember that different investments derive profitability from a variety of economic and market scenarios, and that investments will not all perform at the same time. Otherwise, all investments would make money together and all would lose money together.

With prudent allocation, managed futures may help reduce the overall risk of a portfolio. A prudent investor should ensure that at least a portion of their portfolio is allocated to an alternative asset class that has the potential to perform well when other portions of the portfolio may be underperforming.

Other potential benefits of managed futures may include:

Historically competitive returns over the longer term

Returns independent of traditional stock and bond markets

Access to global markets

The unique implementation of traditional and non–traditional trading styles

Potential exposure to as many as one hundred and fifty markets globally

Liquidity and no lock–ups. The contracts in which the CTAs trade typically have a high degree of liquidity. If suitable to a client´s objectives, devoting five to fifteen percent of a typical portfolio to alternative investments has been shown to increase returns and lower volatility. Because alternative investments may not react in the same way as stocks and bonds to market conditions, they may be used to diversify investments over different asset classes, resulting in less volatility and less risk.

During times of market volatility or declining stock and bond markets, managed futures may be an important part of your portfolio. In the event of a major, sustained downturn of the equity or fixed income markets, managed futures may potentially provide some protection for a client´s overall portfolio. Increasingly sophisticated institutional investors such as pension funds, endowments, foundations, and family offices are allocating larger portions of their portfolios away from equity and fixed income into alternative investments. Managed futures are a sub–class of alternative investments.

Commodity Trading Advisors are regulated by the Commodity Futures Trading Commission (CFTC) and by the National Futures Association (NFA), the congressionally authorized self–regulatory organization of the futures industry. All trading advisors must be registered with the CFTC and those who manage customer accounts must be members of the NFA. Advisors´ Disclosure Documents are required to be submitted to the NFA for review in advance of distribution to prospective investors. On an ongoing basis, the NFA audits Disclosure Documents (particularly performance information), promotional materials, and trading activities. Many CTAs update their performance data on a monthly basis. Violations of CFTC or NFA rules can result in financial penalties, suspension or complete cessation of trading privileges and other penalties.

There are basically three types of charges involved when a managed account is handled by a CTA. An annual management fee usually between 1–2 % of the value of your account is charged for the overseeing of the trading in your account. Normally this fee is charged in monthly, for example a 2% annual fee would result in a 0.1667% monthly charge being applied to the account. Most CTAs also charge a performance incentive fee which typically runs from 15– 25% of the cumulative net trading profits calculated at the end of each quarter. The net trading profits are the combined total of profits and losses from trading. Other costs associated with a managed futures account include FCM brokerage costs, exchange and regulatory association fees.

We recommend that the amount of money you invest be based on your own financial goals and risk tolerance. This should usually be approximately 5-20% of your overall portfolio. Only risk capital should be used in managed futures or any speculative investment. Before opening an account you must be supplied with a copy of the CTA´s Disclosure Document. Read it carefully and go over any questions you have with your broker before you invest. After your questions have been answered and you feel this type of investment is appropriate for you, we will assist you in completing the CTA management agreement and Customer Agreements and account opening forms.

According to the Tax Act of 1981, short–term profits (held for less than one year) in commodities are treated as 60% long term and 40% short term. On the other hand, short–term trading profits in stocks are treated as 100% short term. For individual investors in higher tax brackets, this tax treatment can mean saving as much as 30% on taxes on short–term gains on commodities versus stocks. We strongly recommends that you should discuss the taxation elements relating to your investment with an independent qualified tax advisor.

Managed futures are not appropriate for everyone. A determination must be made as to a particular investor´s suitability, the investor should be provided with all of the necessary information to make sure he or she understands both the risks and possible rewards of this type of investment. In addition to having the required risk capital, an investor needs to have realistic expectations about returns on investment and tolerance to drawdowns that may occur with managed futures products. The risk of loss always exists in futures trading no matter how skilled a trader an individual CTA may be.

CTAs and CPOs (Commodity Pool operators) are required to file disclosure documents with the NFA. The basic disclosure requirements are intended to ensure that potential investors will be apprised of material facts regarding managed investments and advisors so that they can make an informed decision about a particular investment or advisory service before committing their funds. The CFTC in November 1997 delegated to the NFA the authority and responsibility to conduct the reviews of disclosure documents of both CTAs and CPOs required to be filed with the commission. Only upon satisfactory review of the disclosure documents and subsequent approval by the NFA can a CTA or CPO offer his disclosure document to the public for consideration. Disclosure documents provide biographical information on the CTA and generally reviews the trading style and account management philosophy of the CTA as it applies to that particular program. The Document will also contain a review of the trading program along with a list of all fees, potential conflict of interest issues, and a description of the CTA´s risk management methodology. Performance records are also reviewed showing the net trading results after costs have been deducted.

Each CTA has their own minimum account size and that can vary from as low as $25,000 to multiple millions. Generally speaking the newer CTAs have lower minimum entry requirements as they are still in asset building stage whereas older, more established CTAs tend to have higher minimum account requirements.

There are some individual investors who are highly successful in directing their own futures trading if they have the knowledge, experience and resources to do so. However the vast majority of self-directed investors have struggled in their efforts to become successful in futures trading. Studies indicate that as many as nine out of ten self-directed traders lose money. When it comes to managed futures, of the 119 funds and pools in the Managed Account Reports Fund/Pool Qualified Universe Index that traded from January 1990 through October 1996, 81% were profitable over the full-time period. (Source —MAR)

Investors should take particular note of the Trading Advisors Performance Record. However, this in itself should not be the sole reason for choosing a specific CTA. As mentioned above, the Disclosure Document spells out an advisors philosophy and trading style. This should be reviewed along with the track record in making your decision. Track records are important and should show performance tables, spanning several years or more. A strong performance over a short period of time may be nothing more than good fortune. However, positive performance over a long period of time especially in markets that have experienced bull bear and flat trading ranges speak volumes about a CTA´s trading abilities. Track record components to take careful note of:

Length of the trading program … Good fortune or sustainable investing?

Worst peak to valley drawdown … Could your account be profitable assuming worst entry?

Assets under management … Has the manager significant assets under management?

Notional funding gives the investor the ability to leverage their managed futures account. Notional funding in Managed Futures is favored by investors because it capitalizes on the free cost of leverage. The leverage is free because the notionally funded amount is not borrowed or deposited – the funding level is a good faith deposit for the full value of the account.

For example, if you wanted to invest with a CTA that had a minimum investment of $100,000, you could either fully fund the account with a $100,000 or, if notional funding was offered, you could partially fund your account – say, with only $50,000 – but still have it traded as if it was funded with a $100,000. The trading level in this case would be $100,000 with the account funded 50%. If the CTA returned 10% that year, you would have made $10,000 (a 10 % gain on the trading level), but it would be a 20% gain on the notional funding level. While it sounds great in theory, the same is true on the downside. Therefore, using the same example above, if the CTA lost 10% that year, it would be a $10,000 loss, but it would equal a 20% loss on your notionally funded amount.

While many investors may like notional funding (due to the reasoning provided above) other investors are wary of the opportunity because of the increased volatility that it brings. By notionally funding an account with 50% of the funds, all returns and losses present in a performance track record of the CTA, are doubled on a cash basis. Therefore, if an investor cannot handle that much volatility, then notional funding is not right for them.

When investing in Managed Futures, the investor should be concerned with two major fees associated with managed accounts. The first fee is referred to as a management fee, which usually ranges from anywhere on the low end of 0% to a high of 3% (annually). The type of program and the experience of the CTA will help determine the percentage (0%-3%) the investor must pay annually to be in the program. Generally, a prorated portion of the management fee is deducted from the investor’s account on a monthly basis.

The second fee that investors should be aware of is the performance fee or more commonly known as the incentive fee. Prior to the CTA accepting a new account they will negotiate a certain percent of profits that they will keep, giving the CTA an incentive to make the investor money. As the investor makes more and more money so does the CTA. This incentive fee will normally range anywhere from 20% to 30% depending on each CTA. This helps ensure that the CTA will look out for the best interest for your account, because the CTA knows they only make money when the investor is profitable. The incentive fee is a CTAs main source of income.

When a CTA or money manager applies a high water mark to an investor’s money, it means that the manager will only receive performance or incentive fees on that particular account of invested money, when its value is greater than its previous greatest value. Should the investment drop in value then the CTA or money manager must bring it back above the previous greatest value before they can receive incentive fees again. In short, CTAs only receive incentive fees on net new profits.

Investors interested in a managed futures program must review and sign off on the commodity trading advisor’s disclosure document. The disclosure document, or D-Doc as it is commonly referred to, outlines all of the risk factors inherent in managed futures and specifically in the commodity trading advisor’s program. The D-Doc also includes an agreement whereby the client authorizes the CTA to direct trading in the client’s commodity account, and it summarizes any and all management and incentive fees to be charged to your account by the CTA.

All gains earned from managed futures accounts are taxed as if they were made up of 60% long term capital gains and 40% short term capital gains. Therefore, 60% of the gains are considered long term capital gains are subject to a maximum federal income tax of only 15%, compared to the short term capital gains which are subject to a top tax rate of 35%. Unlike many other investments, such as stocks, which need to be held for at least 12 months before they gain the coveted long-term capital gain rights, managed futures investments do not have to be held for a specified period of time in order for the “60-40” rule to apply.

Alternative investments are investment products other than traditional asset types such as stocks, bonds, and cash. Because of their markedly different risk and return characteristics, alternative investments serve to stabilize and add diversification to traditional portfolios, while also potentially increasing long-term returns. There is a broad range of alternative investments, including:

• hedge funds
• managed futures
• commodities
• foreign equities
• real estate
• derivatives contracts

Managed futures are a type of alternative investment traded by professional investment managers known as Commodity Trading Advisors (CTAs). While you can invest in futures on your own, these markets are highly complex. CTAs specialize in managing sophisticated strategies and portfolios of global futures contracts and options. In a managed futures account, a third-party custodian holds your money, but the CTA has full discretionary trading power—choosing when to purchase or sell various futures investments on your behalf.

Most alternative investments—including hedge funds, fund of funds, private equity, venture capital funds, and oil and gas limited partnerships—lack transparency, liquidity, and regulatory oversight. In contrast, managed futures are transparent, highly liquid, and rigorously regulated by the National Futures Association and the Commodity Futures Trading Commission.

One of the main benefits of adding managed futures to a balanced portfolio is the potential to enhance overall portfolio returns and decrease portfolio volatility. Managed futures are a flexible investment option, as they broadly diversify across global markets.

The PRICE Group does not recommend investing in managed futures as a short-term strategy. The futures markets tend to be cyclical, and as such, even the most skilled CTAs may experience periods of flat returns or drawdowns. But held over time, managed futures have the potential to generate solid returns, particularly because of their ability to perform in both bull and bear markets.