Key Takeaways
- Professional managers trade diversified futures portfolios.
- Offers diversification with low stock and bond correlation.
- Primarily uses trend-following and market-neutral strategies.
- Helps reduce portfolio volatility during market stress.
What is Managed Futures?
Managed futures are alternative investment strategies where professional managers actively trade diversified portfolios of futures contracts across global markets such as commodities, currencies, equities, and fixed income. These strategies seek to generate returns independent of traditional stock and bond markets by exploiting trends and market inefficiencies.
By incorporating managed futures into your portfolio, you can access a form of safe haven exposure that often performs well during periods of market stress or economic uncertainty.
Key Characteristics
Managed futures exhibit distinct features that differentiate them from traditional investments:
- Diversification: Exposure to over 200 global markets with low correlation to stocks and bonds enhances portfolio resilience.
- Systematic Strategies: Employ primarily trend-following and market-neutral approaches, often using volatility-based position sizing.
- Long and Short Positions: Flexibility to profit in both rising and falling markets through futures contracts.
- Liquidity and Transparency: Trades occur on regulated exchanges with daily pricing, reducing counterparty risk compared to hedge funds.
- Risk Management: Use of drawdown controls and volatility targeting to manage downside risks effectively.
How It Works
Managed futures managers, often Commodity Trading Advisors (CTAs), use quantitative models to identify and exploit momentum across various asset classes. The dominant strategy, trend-following, involves going long on rising assets and short on declining ones based on signals such as excess returns over cash or other macroeconomic factors.
Positions are scaled according to volatility to maintain balanced risk allocation, aiming for consistent returns regardless of market direction. Some funds combine multiple CTA programs to achieve broader diversification and smoother performance.
Examples and Use Cases
Managed futures serve a variety of roles within investment portfolios, particularly for diversification and tactical asset allocation:
- Airlines: Companies like Delta and American Airlines can be indirectly affected by commodity price trends captured through managed futures strategies.
- Portfolio Diversification: Adding managed futures alongside traditional equities and bonds can reduce overall volatility and improve risk-adjusted returns.
- Tactical Asset Allocation: Investors may adjust exposure to managed futures as part of a broader tactical asset allocation approach to capitalize on market trends.
Important Considerations
While managed futures offer valuable diversification and crisis alpha potential, they can underperform during range-bound or choppy markets. Trading costs and fees may also impact net returns, so evaluating the fund manager’s track record and strategy is essential.
Understanding metrics such as R-squared can help you assess how closely a managed futures fund’s returns align with broader market benchmarks, aiding in informed investment decisions.
Final Words
Managed futures provide valuable diversification and risk management by trading across global futures markets with systematic strategies. To see if they fit your portfolio, compare different Commodity Trading Advisors’ approaches and historical performance before committing capital.
Frequently Asked Questions
Managed futures involve professional managers trading diversified portfolios of futures contracts across global markets like commodities, currencies, and equities. These strategies aim to generate returns that are independent from traditional stock and bond markets.
Managed futures invest across more than 200 global markets with low or negative correlation to stocks and bonds. This helps reduce overall portfolio risk and can improve returns, especially during market downturns or crises.
The primary strategies include trend-following, which buys rising and sells falling assets; market-neutral, which exploits price differences within the same sector; and carry strategies, which profit from yield differentials in bonds or currencies.
Trend-following strategies identify momentum by buying assets that are rising and selling those that are declining, using signals like 12-month excess returns. Positions are sized based on volatility to maintain balanced risk across markets.
CTAs are professional managers who actively trade futures contracts using systematic, rules-based approaches. They manage risk and seek to capture returns by taking long and short positions across various markets.
Yes, Managed Futures often deliver 'crisis alpha' by performing well when traditional stock and bond markets are stressed. Their low correlation and trend-following strategies help protect portfolios during turbulent times.
A multi-advisor fund pools multiple CTAs to achieve broader diversification. Sponsors handle advisor selection, risk management, and portfolio rebalancing to optimize returns and reduce risk.
Managed futures can benefit investors seeking diversification and risk reduction beyond traditional assets. However, they involve complex strategies and may be more suitable for those with a long-term investment horizon and tolerance for futures market risks.
