What Are Managed Futures?
Managed futures is a category of alternative investments associated with Commodity Trading Advisors (CTA’s), as well as commodity funds, futures funds and pools. CTA’s are professional money managers who specialize in using global futures and options markets as trading vehicles for their clients. These managers can take both long and short investment positions to provide clients potential for gains throughout market cycles, employing a variety of trading strategies and styles. These may include systematic or discretionary trading systems as well as fundamental and technical analysis. CTA’s can offer investors direct exposure to international financial and non-financial asset sectors, including: Energies, Financials, Currencies, Metals, Grains, Meats and Softs.
Why Managed Futures
Managed futures have historically shown a low correlation to other markets and the ability to perform independently of traditional investments. They can help balance portfolio risk and potentially maximize profit in various market cycles. Moreover, managed futures offer a number of key benefits, most notably, Absolute Return, Diversification, Transparency and Liquidity.
Absolute return strategies enable CTAs to produce returns regardless of market direction. While traditional strategies implement long-only techniques to drive client return, absolute return strategies employ a broader toolkit of investment instruments, including short selling, futures, options, derivatives, and use of leverage. It is this versatility of absolute return strategies that drives alpha generation, or risk-adjusted outperformance relative to a benchmark.
Managed futures are investment vehicles that, when blended into a traditional portfolio, can achieve diversification, reduce portfolio volatility, enhance overall return potential, and provide protection during extreme or down equity market cycles.
Transparency & Liquidity
A significant benefit of a managed account with a CTA is its increased transparency and liquidity compared to investment products like hedge funds. These attributes are especially desirable to investors in the current climate
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. Transactions in securities futures, commodity and index futures and options on futures carry a high degree of risk. The amount of initial margin is small relative to the value of the futures contract, meaning that transactions are heavily “leveraged”. A relatively small market movement will have a proportionately larger impact on the funds you have deposited or will have to deposit: this may work against you as well as for you. You may sustain a total loss of initial margin funds and any additional funds deposited with the clearing firm to maintain your position. If the market moves against your position or margin levels are increased, you may be called upon to pay substantial additional funds on short notice to maintain your position. If you fail to comply with a request for additional funds within the time prescribed, your position may be liquidated at a loss and you will be liable for any resulting deficit.
How do managed futures increase transparency & liquidity over a traditional investment?
- With a managed account, investor money is deposited with the investor’s brokerage firm and maintained in a customer segregated funds account. While the trading advisor directs trading for the account, the investor has a full view of all trades, positions, and balances, ensuring complete transparency (this applies to managed accounts not fund structures).
- Managed futures primarily deal in listed markets, meaning that orders are entered on an exchange where counter-parties are abundant and orders are settled daily by the clearing houses. This provides liquidity and limits the potential risk of counter- parties defaulting. In addition, managed accounts and managed futures funds generally do not have a “lock up” period as is commonly found with hedge funds. This means that clients may request to redeem their capital at any time.
- Managed futures funds that invest in managed accounts will have the potential for more transparency and liquidity than funds where investor money is pooled and those that invest in other funds.