Invest In Managed Futures: Diversify And Protect Your Portfolio

Managed futures are an alternative asset class that has achieved good performance in bull and bear markets. Managed futures are a subclass of alternative investment strategies used by large funds and institutional investors to achieve both portfolio and market diversification. They are operated by commodity pool operators (CPOs) and commodity trading advisors (CTAs). CTAs are individuals or organisations responsible for the actual trading of managed accounts and they provide individualised advice regarding the buying and selling of commodity futures, futures options, and/or forward contracts on broad asset classes. Managed futures exhibit low correlation to traditional assets such as stocks, bonds and real estate. They have the potential to lower the overall portfolio risk and increase returns.

Reduced portfolio risk

Managed futures offer the potential for reduced portfolio risk due to their inherent diversity. This diversity allows for lower overall volatility in a balanced investment portfolio.

Managed futures investment portfolios may include agricultural commodities, energy products, metals, interest rates, equities, and foreign and domestic currencies. These are traded on over 150 global financial and commodity markets.

The ability to trade across a wide range of global markets means managed futures have a low correlation to traditional asset classes such as stocks and bonds. This low correlation means managed futures can complement a portfolio's other traditional asset classes. Managed futures have the ability to yield profits regardless of the movement of stocks and other investment vehicles.

Drawdowns, or peak-to-valley declines, are inevitable and cannot be completely avoided. However, because managed futures funds can go long or short, they have the potential to limit drawdowns more effectively than many other investments.

Enhanced returns

Managed futures have the potential to enhance overall portfolio returns. The diversity of managed futures investments and their potential for reduced investment volatility contribute to their capacity to boost overall portfolio gains.

A diverse, well-balanced investment portfolio can offer more effective performance. Adding managed futures to a portfolio of traditional investments provides the potential for higher returns with lower risk.

The ability to take both long and short positions in a wide range of global markets means managed futures can be used to profit from rising and falling markets. They have the potential to lower the overall portfolio risk and increase returns, as they can be traded across a wide range of global markets and have a low correlation to traditional asset classes such as stocks and bonds.

The trend-following strategies used by managed futures funds also contribute to their potential for enhanced returns. These strategies involve using various indicators and technical signals to determine the direction of market momentum. Trend traders tend to enter into a short position when the price of an asset goes down and may take a long position when the price goes up. This allows them to capitalise on clear market trends and effectively manage risk during turbulent market conditions.

The success of managed futures funds is primarily attributed to time-series momentum strategies, so it is important to understand this reliance on trend-following strategies when considering investing in managed futures.

Profit in any economic environment

Managed futures can provide returns in any economic environment. They have demonstrated strong performance during stock market declines and can generate returns in both bull and bear markets. This is because managed futures portfolio managers (CTAs) can go long and short in all types of markets globally, allowing them to profit from short selling or options strategies in down markets.

The ability to take both long and short positions in various markets makes managed futures a powerful tool for investors. They can be used to gain exposure to markets that are not traditionally accessible through stocks, bonds, or real estate investments. For example, commodities are a primary example of an asset class that can be accessed through managed futures.

The inherent diversity of managed futures also contributes to their ability to generate returns in any economic environment. Managed futures investment portfolios can include a wide range of asset classes such as agricultural commodities, energy products, metals, interest rates, equities, and foreign and domestic currencies. This diversification allows managed futures to yield profits regardless of the movement of stocks and other investment vehicles, providing investors with a hedge against market downturns.

The exceptional performance of managed futures during adverse market conditions has not gone unnoticed. Successful institutions, including pension plan sponsors, endowments, and foundations, have been utilising managed futures for a long time and have significantly increased their allocations to this strategy in recent years to help generate returns.

Portfolio diversification

Managed futures are a natural choice for investment portfolio diversification. They offer highly diverse investment opportunities in terms of both geography and product. Managed futures investment portfolios may include agricultural commodities, energy products, metals, interest rates, equities, and foreign and domestic currencies.

Managed futures exhibit low correlation to traditional assets such as stocks, bonds, and real estate. When stocks or bonds head in one direction, managed futures will often go in a different direction. This lack of correlation means managed futures can provide valuable downside protection during market downturns, reducing overall portfolio volatility.

The ability to take both long and short positions in a wide range of global markets makes managed futures highly flexible and ideal risk management tools. They can be used to enact long/short strategies in many markets, providing exposure to markets that are not traditionally accessible through stocks, bonds, or real estate.

The tight regulation of the managed futures industry also contributes to portfolio diversification. The CFTC and the NFA are the two major regulatory agencies involved in keeping the industry credible and trustworthy. This regulation results in maximum transparency for investors, who have daily access to account statements, details of all positions, and complete disclosure information.

Transparency and liquidity

Managed futures are a highly regulated and transparent investment option. In the US, the CFTC (Commodity Futures Trading Commission) and the NFA (National Futures Association) are the two main regulatory agencies that ensure the managed futures industry remains credible and trustworthy. The CFTC has the power to bring criminal charges against those who engage in fraudulent conduct or abusive practices, while the NFA reviews and creates its own regulations to help safeguard market integrity.

Commodity Trading Advisors (CTAs) who manage client assets in the form of managed futures are required to register with both the CFTC and the NFA. They must also undergo an FBI-aided background check and supply rigorous disclosure documents and independently audited financial statements. This tight regulatory framework results in maximum transparency for investors.

CTAs are required to provide their clients with daily access to account statements, complete position details, and comprehensive disclosure information. The daily settlement of managed futures accounts means that investors can monitor and track daily account activities. This daily crediting and debiting of accounts also contribute to the high liquidity of managed futures investments. Investors maintain tight control over their accounts and can withdraw or transfer funds as necessary to further reduce risk.

The highly liquid nature of managed futures is further enhanced by the ease of establishing or liquidating a large portfolio of positions in moments, if necessary. There are hundreds of liquid futures products available globally across interest rates, stock indexes, foreign exchange (FX), and commodities.

Benefits of Transparency and Liquidity

The transparency and liquidity offered by managed futures provide several benefits to investors:

• Risk Mitigation: The ability to closely monitor investments and quickly liquidate positions helps investors reduce risk and protect their capital.
• Enhanced Control: Investors can make informed decisions and maintain tight control over their accounts, ensuring their investments align with their risk tolerance and financial goals.
• Flexibility: The liquidity of managed futures allows investors to adapt their portfolios swiftly in response to changing market conditions or personal financial needs.
• Diversification: The transparency and liquidity of managed futures make them a valuable component of a well-balanced and diversified investment portfolio.

Frequently asked questions