Managed Futures
The term Managed Futures describes an industry made up of professional traders known as Commodity Trading Advisors (CTAs) who manage client assets on a discretionary or systematic basis using global futures markets as investments. Managed futures are a highly regulated industry which have historically performed independently of the stock and bond markets. Numerous Studies have shown that including Managed Futures as part of a diversified portfolio can help investors reduce the overall risk of volatility and enhance the portfolio's rate of return.
Commodities
Traditional commodities include grains (corn, soybeans, wheat, oats, etc.) as well as livestock, porkbellies, hogs, lumber, etc. However, the term Commodity Futures Advisor is actually a misnomer. In addition to traditional commodities, CTAs may trade a wide variety of globally diversified futures contracts including currencies, interest rate contracts, precious metals such as gold and silver, stock indices, energy, as well as the interbank cash currency market known as foreign exchange. Some CTAs specialize in specific market sectors while others invest globally in as many as 150 or more assets classes.
Trend Following Approach
Many managed futures traders use a trend following trading approach that allows them to go long or short (buy or sell) in any market environment in their attempt to profit on major market movments. Price action is often the primary consideration while other indicators such as volume, open interest, price momentum, etc. are used to confirm the trade. The traders also use probabilities and statistical analysis in their attempt to determine the direction of the trend. This approach helps take the emotional element out of trading.
Investing in managed futures also involves risk of loss and is not suitable for everyone. Many different market factors can affect the performance of a portfolio. Past performance is not necessarily indicative of future results.
Exponential Growth In Managed Futures
There's been exponential growth in Managed Futures during the past twenty years. Some of the reasons for this phenominal growth include: Opportunity to profit independent of economic environment.
Access to expanding global market place.
Potential to profit in both bull and bear markets.
Low to slightly negative correlation with stocks and bonds can reduce overall portfolio risk.
Actively managed accounts vs. passive buy and hold strategy.
Traders may go long or short depending on the market conditions.
Participants in the Managed Futures Industry
Commodity Trading Advisors (CTAs)
Commodity Trading Advisors are responsible for the actual trading of managed futures accounts. With a few exceptions (CTAs trading for fifteen or fewer investors) they are registered with the Commodity Futures Trading Commission (CFTC) and are members of the National Futures Association (NFA), which is the self-regulatory organization for futures and options markets.
The two major types of advisors are technical traders and fundamental traders. Technical traders may use computer software programs to follow price patterns, trends and perform quantitative analysis. Fundamental traders forecast prices by analysis of supply and demand factors, economic conditions and other market information. Either trading style can be successful and many advisors incorporate elements of both approaches.
Futures Commission Merchants (FCMs)
Futures Commission Merchants are the brokerage firms that execute, clear, and carry CTA-directed trades on the various exchanges. Many of these firms also act as CPOs and trading managers, providing administrative reports on investment performance. Additionally, they may offer customers managed futures funds to help diversify their portffolios. FCMs are required to meet minimum capitalization requirements as set by the Commodity Futures Trading Commission (CFTC).
Commodity Pool Operators (CPOs)
Commodity Pool Operators assemble public funds or private pools. In the United States, these are usually in the form of limited partnerships. There are approximately 1,500 CPOs registered with the NFA. Most commodity pool operators hire independent CTAs to make the daily trading decisions. The CPO may distribute the product directly or act as a wholesaler to the broker-dealer community.
Managed Futures - Opportunity vs. Risk
There are financial risks as well as opportunities involved when investing in Managed Futures. The Commodities Futures Trading Commission (CFTC) requires that prospective customers be provided with risk-disclosure documents which should be carefully reviewed before investing. Investors should only invest risk capital. Past performance is not necessarily indicative of future results. Below are several equations that are used to evaluate the risk-return element of managed futures:
Important Considerations
Investors should consider their investment objectives, available risk capital, risk tolerance, and investment time horizon before investing in managed futures. Managed Futures should not be used for investing short-term capital. Each investor should weigh the risk-reward benefits of managed futures and decide how they fit into their portfolio's investment strategy.
Using Managed Futures to Diversify Your Portfolio.
There can be important diversification benefits when investing in managed futures. One of the key facets of Modern Portfolio Theory, 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 slightly negative correlations. Managed futures investments, with their low correlation to traditional investments, fit well into the above category. Managed futures have historically performed independently of the stock and bond markets.
Benefits of Investing in Individual Managed Futures Accounts
Investing a portion of your portfolio in Individual Managed Futures Accounts also offer investors the benefits of transparency. The investors can monitor their account statements daily. The CFTC also requires Futures Commission Merchants to meet minimum capitalization requirements.
Commodity Trading Advisors (CTAs) make trading decisions on behalf of their clients through revocable power of attorney. Your funds are placed in a segregated account. The CTA cannot withdraw or transfer funds. They can only trade your funds. CTAs are also subject to unannounced audits.
The Clearing Corporation of each commodity exchange guarantees every transaction on its exchange and the clearing corporation is separate and independent from the exchange. According to a March, 2008 report, customer losses due to the insolvency of a futures brokerage firm have been virtually non-existent since the inception of futures trading in the U.S.
Investing in Managed Futures also involves substantial risk of loss and is not suitable for everyone. Past performance is not necessarily indicative of future results. Many different factors can affect the performance of a portfolio. Investors must read the disclosure documents before they invest.
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