The term managed futures describes an industry made up of professional money managers known as Commodity Trading Advisors (CTAs). As investors look for greater diversity in their portfolios, these trading advisors manage client assets on a discretionary basis using global futures and options on futures markets as an investment medium.
Investment management professionals have been using managed futures for more than 30 years. More recently, institutional investors such as corporate and public pension funds, endowments and trusts, and banks have made managed futures part of a well-diversified portfolio.
Four Benefits of Managed Futures
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Reduced Portfolio Volatility Risk. The primary benefit of adding a managed futures component to a diversified investment portfolio is that it may decrease portfolio volatility. This is possible due to the low- to slightly negative correlation of managed futures with equities and bonds. One of the key tenets of Modern Portfolio Theory, as developed by the Nobel Prize economist Dr. Harry M. Markowitz, is that more efficient investment portfolios can be created by diversifying among asset categories with low to negative correlations.
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Potential for Enhanced Portfolio Returns. While managed futures investments carry a substantial amount of risk, they have the potential to enhance overall portfolio performance due to the benefits of diversification and crisis alpha.
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Ability to Take Advantage of Any Economic Environment. Managed futures programs can trade price trends in a number of economic climates. They can buy futures positions in anticipation of a rising market or sell futures positions in anticipation of the opposite. For example, during periods of inflation, hard commodities such as gold, silver, oil, grains, and livestock tend to do well, as do the major world currencies. In deflationary times, futures provide an opportunity to profit by selling into a declining market with the expectation of buying, or closing out the position, at a lower price. Trading advisors can even use strategies that employ options on futures contracts, giving rise to profit potential in flat or neutral markets.
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Ease of Global Diversification. The establishment of global futures exchanges and the accompanying increase in actively traded contract offerings has allowed trading advisors to diversify their portfolios by geography as well as by product. For example, managed futures accounts can participate in at least 150 different markets worldwide, including stock indexes, financial instruments, agricultural products, precious and nonferrous metals, currencies, and energy products. Trading advisors thus have ample opportunity for profit potential and risk reduction among a broad array of non-correlated markets.