What Are Managed Futures?
Let me explain what managed futures are: they're investments where professionals actively manage a portfolio of futures contracts. As an alternative investment, they're popular with funds and institutional investors for adding diversification to both portfolios and markets.
You get this diversification because managed futures expose you to asset classes that help reduce portfolio risk in ways that straight investments in stocks and bonds can't. Their performance often has a weak or inverse correlation with traditional stock and bond markets, which makes them a solid choice for rounding out a portfolio based on modern portfolio theory.
Understanding Managed Futures
I've seen managed futures increasingly positioned as an alternative to traditional hedge funds. Funds and institutional investors use hedge funds to diversify their portfolios of large-cap stocks and high-rated bonds.
One big reason hedge funds worked for diversification is their activity in the futures market. Managed futures have stepped in here to provide a more straightforward diversification option for these investors.
The Rise of Managed Futures
Managed futures came about through the Commodity Futures Trading Commission Act, which defined roles for commodity trading advisors (CTAs) and commodity pool operators (CPOs). These professionals differ from stock fund managers because they regularly deal with derivatives in ways most others don't.
The CFTC and the National Futures Association regulate CTAs and CPOs, performing audits and enforcing quarterly reporting. This strict regulation is why these products have become favored over hedge funds by institutional investors.
How Managed Futures Trade
Managed futures can vary in their allocations to stocks and derivatives. A diversified account typically covers markets like commodities, energy, agriculture, and currency. Most accounts have a stated trading program outlining their approach, with two common ones being market-neutral and trend-following strategies.
Market-Neutral Strategy
In a market-neutral strategy, you aim to profit from spreads and arbitrage opportunities from mispricing. If you're using this approach, you often mitigate market risk by taking matching long and short positions in an industry to gain from both rising and falling prices.
Trend-Following Strategy
Trend-following strategies seek profits by going long or short based on fundamentals or technical signals. If an asset's price is trending down, you might short it; if it's trending up, you go long. The idea is to analyze indicators, determine the direction, and make the trade to capture gains.
Final Notes for Investors
If you're considering managed futures, you can request disclosure documents that detail the trading strategy, annualized returns, and other performance metrics.
Key Takeaways
- Managed futures are alternative investments with professionally managed futures contract portfolios.
- They're used by large funds and institutions for diversification as an alternative to hedge funds.
- Common strategies include market-neutral for profiting from mispricing and trend-following for trading based on signals.
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