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Managed futures are investment options and are similar to mutual funds. Managed futures, however, are positioned in government securities and are managed through future contracts or various options on future contracts. Those who invested in managed futures a few years ago have seen their earnings doubled. Analysts are very optimistic on the future of managed futures. They expect the market to continue to grow in the medium to long-term if stocks under-perform or returns on hedge funds are flat. Managed Futures Offer Efficient Hedging Mechanism: managed futures come across as an attractive investment option because of their potential of reducing portfolio risk. Market studies indicate that when asset classes are combined with alternative investment options, such as, managed futures, risk reduces significantly. This is because such a combination diversifies the portfolio through negative correlation between various asset groups. Managed futures have inverse correlation with bonds and stocks. They can successfully track the performance of various stocks and provide an efficient hedge mechanism to any potential damage to equities in adversities. This means, managed futures program are outperforms even in the conditions of rising inflation when the stocks and bonds generally under-perform. Thus, fund managers suggest combining managed futures with various other asset groups for better allocation of your investment capital. Who Manages Your Managed Futures? Managed futures are managed by professional money mangers popularly known as Commodity Trading Advisors (CTAs). CTAs are the registered representatives of the U.S. Commodity Futures Trading Commission (CFTC). They are given license to do the business only after the FBI thoroughly checks their background; they are bound to produce all the disclosure documents such as independent audits of financial statements on an annual basis before the National Futures Association (NFA) for review. CTAs take decisions on the positions of the managed futures based on their analysis of the potential profits the futures would yield. They manage their clients’ futures by a proprietary trading system through long or short future contracts in various industries. Evaluate Your CTAs before Investing With Them: You must make some important assessments before making the final decision of investing in a particular asset class with a money manger. You can obtain all the necessary information for such assessments in the disclosure documents that will be provided to you by the CTAs. Insist on getting the disclosure document even during the initial stages of your meetings with the CTAs, when you might be just considering an investment option. Such a document will have all the necessary details pertaining to the CTAs trading plan and the fees they charge. Mostly, the CTAs charge 2% management fees and demand 20% as performance incentive. However, such fees may differ largely in some cases. The futures markets and the equities markets seem to be correlating more and more every day over the past 4 years. I first noticed this phenomena back in 2006 and now it is more present than ever. It seems as if there is one big liquidity trade and if money is flowing into the markets both futures and equities go up and if there is money flowing out both futures and equities go down. I have done some testing on this pattern which confirmed my suspicion that long term equity holdings are correlated with long-term futures systems. The interesting thing that I found is that combining long-term trend following futures trading with short term equities trading seems to yield the best overall results. Short term equities trading is negatively correlated with long term futures trading but long term equities trading is highly correlated with long term futures trading. This destroys a lot of the myths that you want to add managed futures to an equity portfolio. While it is true that if the trend is down for long enough long-term futures traders will eventually get short which will offset equity losses, but the rest of the time they correlate tremendously, much more than people think. To me the true benefit of systematic trading is to add multiple uncorrelated systems such as short term equities with both short and long term futures trading. Managed futures and trend following specifically seem to only help an equities portfolio in a bear market and the rest of the time there is little incremental value. Take for instance the markets over the past two weeks, they have been almost perfectly correlated. In theory this is not supposed to be the way it should work according to the literature and beliefs that futures systems diversify an equities portfolio. A futures programs that is shorter term and/or not directional may but like I said above I find short term equities in combination with long term trend following to be the best combination.
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managed futures
