Managed Futures

What are Managed Futures?

A managed futures fund is a pool of investment dollars that is managed by one or more professional money managers that trade in the futures and currency forwards markets.  These professional money managers are referred to as Commodity Trading Advisors (CTA’s) due to the historical association of futures trading with physical commodities.  Currently, the trading of futures contracts is dominated by financial instruments, such as stock indices, interest rate instruments and currencies. 

The futures and currency forwards markets encompass a wide variety of investment vehicles including global currencies, precious and industrial metals, energy, global fixed-income instruments, global stock indices, and agricultural commodities.  Multiple exchanges exist around the globe, providing money managers with trading venues that extend beyond U.S. markets and time zones. 

A managed futures fund may provide investors with exposure to a variety of domestic and global trading instruments, international trading venues, and international time zones.  In addition, these markets allow for the use of leverage, which, if utilized, will increase the magnitude of realized and unrealized trading gains and losses.

Managed futures funds are also characterized by the ability of the CTA to establish either long or short positions in the targeted market sector.  This flexibility affords the futures or currency forwards trader the ability to potentially profit (or experience losses) when prices for a given investment vehicle are rising or falling. 
 

Managed Futures is an Alternative Investment

Managed futures represent a rapidly growing investment class labeled alternative investments.  Alternative investments have grown in popularity with both institutional and individual investors as a means of achieving greater portfolio diversification.

Modern Portfolio Theory, originated by Nobel Laureates Harry Markowitz, Merton Miller and William Sharpe, defines the concept of an “efficient frontier” for investment portfolio construction.  This theory attempts to identify the specific combination of investment classes (stocks, bonds, cash, real estate, hedge funds, managed futures funds, etc.) that produces, utilizing historical data, the optimal balance between risk and reward.  Modern Portfolio Theory observes that when two or more investments with similar historical returns and low historical performance correlation are combined into a single portfolio the historical standard deviation of returns, or risk, of the overall portfolio declines. 

Alternative investments have grown in popularity as a result of their anticipated impact on overall portfolio performance.  Institutional and individual investors have been increasing their exposure to alternative investments in an attempt to improve the risk/reward balance within their investment portfolios.

The future performance of any investment or investment portfolio is not certain and the reliance on historical information does not ensure any particular outcome.  The past performance of any investment, including alternative investments, such as managed futures funds, is not indicative of future results. 

Managed futures funds are speculative and not suitable for all investors.  Investors should consult with their financial advisor and thoroughly read a fund’s offering materials before considering an investment in a managed futures fund.