Why Managed Futures?
Managed futures as an asset class is increasingly being recognized as an important investment alternative that can potentially enhance the returns and lower the overall volatility of a portfolio.
Although futures investments involve substantial risk and are not suitable for everyone, the introduction of managed futures to an investment portfolio can both reduce risk and enhance performance.
Seven Benefits of Managed Futures
- Potential for enhanced portfolio returns.
- Liquidity facilitates easy entry and exit of market positions.
- Transaction costs lower than those of comparable cash markets.
- Opportunity for reduced portfolio risk.
- Ability to profit in any economic environment.
- Opportunity to participate easily in global markets.
- Managed Futures offer potential tax benefits versus stocks.
Futures and Portfolio Diversification
Many people view commodity futures as an asset class that is "too risky", "too volatile", "too difficult to understand" and "too complicated to manage". While commodity futures are not for everyone, they may play an important part in a well diversified portfolio.
Recent research by Gary Gorton, of the Wharton School and K. Geert Rouwenhorst of Yale University, examined commodity futures as an asset class. Gorton and Rouwenhorst constructed an equally weighted index of commodity futures monthly returns over a 25 year period. They found that the returns and Sharpe ratios were similar to equities. Commodity futures, however, are negatively correlated with both equity and bond returns. This negative correlation is due to different behavior over the business cycle. Commodity futures are positively correlated with inflation and changes in expected inflation.
For those investors who are willing and able to bear the risks inherent in futures trading, a portion of their portfolios should be allocated to a program of managed futures. Managed Futures are the oldest form of Hedge Funds. CTAs (Commodity Trading Advisors) are registered with the NFA and regulated by the CFTC. The transparency of Managed Futures is unparalleled in the realm of alternative investments. The decisions of your manager are fully reflected in your daily statement and are marked to the market every day. All the positions in your account are in liquid markets trading on regulated futures exchanges. If you don’t like what you see, you can liquidate your positions on a day’s notice. You can still lose money but at least you know what you have and what it is worth.
A Cautionary Note
One of the most popular strategies amongst CTAs is the sale of naked options. This strategy tends to work in periods of relatively low volatility, however when volatility spikes, the strategy frequently results in disaster. We therefore suggest that investors intent on allocating funds to CTAs employing such strategies do so with a small portion of their portfolio or as part of an overall blended portfolio of varied trading styles to diversify holdings in hopes of offsetting such risks. Your Dorman Introducing Broker can assist you in creating such blended portfolios.
Managed Accounts FAQ (PDF)