Managed futures refer to a diversified portfolio of futures contracts actively managed by professional money managers, known as Commodity Trading Advisors (CTAs). These professionals use futures markets, and sometimes options, to achieve diverse investment strategies that aim to deliver attractive returns while managing risk.
Understanding Managed Futures
Definition and Basics
Managed futures are a type of alternative investment that involves gaining exposure to various futures markets, including commodities, currencies, interest rates, equity indices, and more. This form of investment relies on CTAs who apply various trading strategies to capitalize on market trends and hedge against risks.
Professional Management by CTAs
CTAs are registered with the Commodity Futures Trading Commission (CFTC) and are members of the National Futures Association (NFA). Their expertise allows them to navigate highly complex futures markets and use sophisticated trading strategies.
Mechanisms of Trading Managed Futures
Trading Strategies
-
Trend Following: CTAs often use trend-following strategies, which involve identifying and capitalizing on market trends. This strategy can be effective in both up and down markets.
-
Counter-Trend: This strategy involves trading in the opposite direction of the prevailing market trends, betting on reversals.
-
Arbitrage: Exploiting price discrepancies between related securities to earn risk-free profits.
-
Spread Trading: Involves taking long and short positions in two related futures contracts to benefit from the price differential.
Diversification Benefits
Managed futures provide significant diversification benefits because they have low correlation with traditional asset classes like equities and bonds. This makes them an effective hedge during market downturns.
Historical Context and Development
The concept of managed futures evolved in the late 20th century with the increasing complexity of financial markets and the need for diversified investment strategies. Hedge funds often integrate managed futures into their portfolios to achieve better risk-adjusted returns.
Applicability and Practical Use
Institutional Investors
Many institutional investors, including pension funds, endowments, and hedge funds, allocate a portion of their portfolios to managed futures to enhance diversification and achieve non-correlated returns.
Retail Investors
Retail investors can access managed futures through managed accounts, mutual funds, and exchange-traded funds (ETFs), offering a range of funds with varying risk profiles and investment strategies.
Related Terms
- Commodity Trading Advisor (CTA): A professional who manages client assets using futures and options strategies.
- Futures Contract: A legally binding agreement to buy or sell a commodity or financial instrument at a predetermined price in the future.
- Hedge Fund: A pooled investment fund that employs various strategies to earn active returns for its investors.
FAQs
What are the risks associated with managed futures?
How do managed futures perform during market downturns?
What is the role of a CTA in managed futures?
References
- Commodity Trading Futures Commission (CFTC) - https://www.cftc.gov
- National Futures Association (NFA) - https://www.nfa.futures.org/
- “Managed Futures for Institutional Investors” by Galen Burghardt and Brian Walls
Summary
In conclusion, managed futures represent a sophisticated investment strategy offering portfolio diversification and risk management via professional management. Understanding the complexities and potential benefits as well as risks involved in managed futures can provide investors with enhanced investment portfolio options.
