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Managed Futures describes and industry that is4. Ease of Global Diversification - The
made up of professional money mangers whoestablishment of global futures exchanges and the
trade in investments such as commodities,accompanying increase in actively traded contract
futures, and foreign currency in lieu of traditionalofferings has allowed trading advisors to diversify
investment s such as stocks and bonds. Thesetheir portfolios by geography as well as by
money managers are called Commodity Tradingproduct. For example, managed futures accounts
Advisors(CTAs)can participate in at least 150 different markets
worldwide, including stock indexes, financial
instruments, agricultural products, precious and
Unlike commodity or stockbrokers who makesnonferrous metals, currencies, and energy
recommendations on individual commodities orproducts. Trading advisors thus have ample
stocks, Commodity Trading Advisors have aopportunity for profit potential and risk reduction
proven track record and trading style,and areamong a broad array of non-correlated markets.
under strict regulation with the NFA National
Futures Association.Managing Risk
One of the major arguments for diversifying into
Whether the economy is in a recession, anmanaged futures is their potential to lower
economic boom or is stagnant…whetherportfolio risk. Such an argument is supported by
interest rates rise or fall…whether there is anmany academic studies of the effects of
economic crisis or stability…in virtually anycombining traditional asset classes with alternative
economic environment, professionally managedinvestments such as managed futures. Dr John
futures, unlike stocks, can potentially prosper.Lintner of Harvard University is perhaps the most
cited for his research in this area.
Defining Managed FuturesTaken as an alternative investment class on its
own, the managed-futures class has produced
The term "managed futures" referscomparable returns in the decade before 2005.
to a 30-year-old industry made up of professionalFor example, between 1993 and 2002, managed
money managers who are known asfutures had a compound average annual return of
"commodity trading advisors" (CTAs).6.9%, while for U.S. stocks (based on the
CTAs are required to register with the U.S.S&P 500 total return index) the return was
government's Commodity Futures Trading9.3% and 9.5% for U.S. Treasury bonds (based
Commission (CFTC) before they can offeron the Lehman Brothers long-term Treasury bond
themselves to the public as money managers.index). In terms of risk-adjusted returns, managed
CTAs are also required to go through an FBIfutures had the smaller drawdown (a term CTAs
deep background check, and provide rigoroususe to refer to the maximum peak-to-valley drop
disclosure documents (and independent audits ofin an equities' performance history) among the
financial statements every year), which arethree groups between Jan 1980 and May 2003.
reviewed by the National Futures AssociationDuring this period managed futures had a -15.7%
(NFA), a self-regulatory watchdog organization.maximum drawdown while the Nasdaq Composite
Index had one of -75% and the S&P 500
CTAs generally manage their clients' assets usingstock index had one of -44.7%.
a proprietary trading system, or a discretionary
method, that may involve going long or short inAn additional benefit of managed futures includes
futures contracts in areas such as metals (gold,risk reduction through portfolio diversification by
silver), grains (soybeans, corn, wheat), equitymeans of negative correlation between asset
indexes (S&P futures, Dow futures,groups. As an asset class, managed futures
NASDAQ 100 futures), soft commodities (cotton,programs are largely inversely correlated with
cocoa, coffee, sugar) as well as foreign currencystocks and bonds. For example, during periods of
and U.S government bond futures. In the pastinflationary pressure, investing in managed futures
several years, money invested in managedprograms that track the metals markets (like gold
futures has more than doubled and is estimatedand silver) or foreign currency futures can provide
to continue to grow in the coming years if hedgea substantial hedge to the damage such an
fund returns flatten and stocks underperform.environment can have on equities and bonds. In
other words, if stocks and bonds underperform
Benefits of Managed Futuresdue to rising inflation concerns, certain managed
1. Reduced Portfolio Volatility Risk - The primaryfutures programs might outperform in these
benefit of adding a managed futures componentsame market conditions. Hence, combining
to a diversified investment portfolio is that it maymanaged futures with these other asset groups
decrease portfolio volatility risk. This risk-reductionmay optimize your allocation of investment capital.
contribution to the portfolio is possible because of
the low to slightly negative correlation of managedEvaluating CTAs
futures with equities and bonds. One of the keyBefore investing in any asset class or with an
tenets of Modern Portfolio Theory, as developedindividual money manager you should make some
by the Nobel Prize economist Dr. Harry M.important assessments, and much of the
Markowitz, is that more efficient investmentinformation you need to do so can be found in
portfolios can be created by diversifying amongthe CTA's disclosure document. Disclosure
asset categories with low to negative correlations.documents must be provided to you upon
request even if you are still considering an
2. Potential for Enhanced Portfolio Returns - Whileinvestment with the CTA. The disclosure
managed futures can decrease portfolio volatilitydocument will contain important information about
risk, they can also simultaneously enhance overallthe CTA's trading plan and fees (which can vary
portfolio performance. Adding managed futures tosubstantially between CTAs, but generally are 2%
a traditional portfolio can help to improve overallfor management and 20% for performance
investment quality. This is substantiated by anincentive). In addition, most CTA's require large
extensive bank of academic research, beginningminimum investments, however investors can get
with the landmark study of Dr. John Lintner ofaround this buy going through a commodities
Harvard University, in which he wrote thatbrokerage firm that has an agreement with
“The combined portfolios of stocks (orvarious CTA's and acts as a liaison between the
stocks and bonds) after including judiciousinvestor and the CTA. Another benefit of working
investments…in leveraged managed futureswith a broker, is their ability to create a CTA
accounts show substantially less risk at everydiversified porfolio to match your goals and risk
possible level of expected return than portfoliostollerence.
of stocks (or stocks and bonds) alone.”
(Lintner, John, “The Potential Role ofIn Conclusion
Managed Commodity Financial Futures AccountsManaged Futures can help:
(and/or Funds) in Portfolios of Stocks and
Bonds,” Annual Conference of Financial1. Help improve portfolio performance
Analysts Federation, May 1983)
2. Reduce portfolio volatility risk
3. Ability to Take Advantage of Any Economic
Environment - Managed futures trading advisors3. Non-correlated investment (to stocks &
can take advantage of price trends. They canbonds)
buy futures positions in anticipation of a rising
market or sell futures positions if they anticipate a4. Historically serve as a natural hedge against
falling market. For example, during periods ofinflation.
hyperinflation, hard commodities such as gold,
silver, oil, grains, and livestock tend to do well, as5. Portfolios incorporating Managed Futures
do the major world currencies. During deflationaryshowsubstantially less risk at every possible level
times, futures provide an opportunity to profit byofexpected return than portfolios of stocks (or
selling into a declining market with the expectationstocks &bonds) alone.*
of buying, or closing out the position, at a lower
price. Trading advisors can even use strategies* Chicago Board of Trade, “Managed
employing options on futures contracts that allowFutures”, Publication (2003 edition).
for profit potential in flat or neutral markets.
However, profits are not guaranteed, and there isFutures trading involves risk of loss and is not
risk of substantial loss.appropriate for all investors.