Managed futures is an investment strategy that falls within the ‘Alternative Investment’ classification, itself a term used to identify a wide range of investments distinguished by their low (and often negative) correlation with traditional stock and bond investments.
While managed futures is just one of several ‘alternative investment’ strategies, its performance is historically non and/or negatively correlated with conventional stock-bond portfolios, and provides diversification that has historically reduced portfolio volatility at a given return level, or enhanced returns at a given level of portfolio volatility.
Managed futures investment advisors — formally known under the current regulatory regime as ‘commodity trading advisors’ — express their investment positions by trading on global futures markets, both in the US and overseas. These managers participate in a wide range of global futures markets, including currencies, interest rates, stock indices, metals, energy, and agricultural, delivering a high level of portfolio diversification. They can take both long and short positions, providing the opportunity to profit in both rising and falling markets.
The following is a simple example of the diversification offered by a typical managed futures portfolio:
Managed futures are a powerful tool that have historically offered investors attractive returns and reduced portfolio risk.
Past performance is not indicative of future results.
An increasing number of investors, including individuals, pension plans, college and university endowments, foundations, banks, and other large institutions have made and increased allocations to managed futures, have selected managed futures as a means of achieving valuable diversification beyond a traditional stock and bond portfolio. According to the Center for the International Securities and Derivatives Markets at the University of Massachusetts, Amherst, total assets invested in managed futures grew from approximately $40 billion in 2000 to over $225 billion in 2008.
Historically, managed futures have provided favorable risk-adjusted rates of returns when compared to traditional assets. Statisticallly, an investment in a single trading advisor is shown to have risks and returns which are similar to investment in a single equity. Moreover, a portfolio of trading advisors have historically shown to have risks and returns which are similar to traditional equity portfolio investments.
Past performance is not indicative of future results. Managed Futures and Options are speculative, involve a high degree of risk and may not be suitable for all investors.
Managed futures have historically performed independently of stocks and bonds. A well-balanced portfolio whose underlying asset classes are able to perform independently of one another should lead to less volatility and higher returns. Managed futures trading advisors can establish short positions as easily as long positions, potentially profiting from declining or rising markets around the world. The potential to benefit from bullish or bearish markets is a strong reason to include managed futures as market environments change.
As well, managed futures investment advisors can also achieve greater diversification through trading a wide range of global markets, including currencies, interest rates, and stock indices, along with commodities such as energy, metals and agricultural products. This diversification also contributes to reducing portfolio risk, compared with concentration in traditional investments.
Nobel Prize-winning academic research and the time-tested investment practices of large investment institutions have demonstrated the benefits of portfolio diversification, in a process called “strategic asset allocation.” The power of strategic asset allocation can help you increase your expected return and reduce your risk of loss.
Harry Markowitz, Nobel prizewinner in economics, showed that a portfolio’s risk could be reduced and the expected rate of return increased by combining different asset classes (like stocks, bonds, and managed futures) whose prices move at different times in relation to one another (are not correlated). 1
Jack Meyer, fund manager of Harvard University's endowment, summarized the benefit of not putting all of your eggs in one basket:
The benefits of diversification are indisputable. Diversification rules. It’s powerful and our portfolio is a good deal less risky than the S&P 500. 2
Managed Futures and Options are speculative, involve a high degree of risk and may not be suitable for all investors.