Managed Futures
Systematic trading has produced a long-term two-digit yearly earnings ratio
Managed futures follow highly varied trading strategies, from trend-following models and arbitrage programs to complex options strategies. These strategies have historically performed very well compared to traditional investments, especially when the stock markets are facing difficult times.
Managed futures provide distinct investment advantages
Managed futures are a specialized class of hedge fund. Since they rely on fairly unique sources of return, they are outstanding choices for portfolio diversification and investment.
Managed futures managers, also referred to as CTAs (commodity trading advisors) in the US, are professional investment managers or assets administrators, who are subject to strict regulation by the relevant authorities in the USA and the United Kingdom. Within this established and strongly growing industry, managed futures mangers manage more than $267 billion USD worldwide. Over 50% of American pension funds are invested in managed futures programs, and managed futures have been a permanent feature in the portfolios of well-known universities for decades. Here are some of the outstanding advantages that managed futures have to offer:
- Managed futures are very transparent, so investors can see exactly what is happening in the account’s development
- Managed futures are strictly regulated, keeping investors safe
- Dealing exclusively with exchange traded securities, managed futures are standardized and highly liquid
- Managed futures provide a mechanism for protecting against inflation or deflation.
- A wide array of different managed futures strategies exist, each with the ability to diversify itself by investing in global markets and financial instruments
- Extremely low correlations to traditional investments, such as stocks and bonds, enable investors to profit independent of market conditions
- Managed futures use sources of return that are completely different from those of traditional investments, such as stocks and bonds
These advantages place managed futures at the top of the hedge fund league. By setting themselves apart from the crowd, managed futures form a solid investment, and can play a very important role in a diversified portfolio.
Managed futures provide diversification precisely when it is most needed
Managed futures trading programs exhibit a low correlation to the development of the stocks and pension bond markets, and are suitable to be included in the classic portfolio mix. Stock bubbles come and go, but commodities are essential even in times of crisis. This often results in managed futures generating positive returns while stock markets tank.
Investments solely in managed futures are risky like stock investments, but due to their lack of correlation, portfolios containing a mixture of managed futures and traditional investments generally exhibit an extremely attractive risk-return profile.
"A diversified portfolio containing investments that are not correlated with stocks [managed futures], can offer the highest yield with the lowest risk."
Dr. Harry M. Markowitz, the originator of modern portfolio theory Theorie
Managed futures are especially well-suited within the traditional portfolio mix
Including managed futures in a portfolio with stocks and bonds is a way to sustain portfolio gains, while reducing market risk. Since each managed futures manager uses a unique set of strategies and markets, managed futures are ideal for portfolio diversification and risk reduction.
The lack of correlation between managed futures and traditional investments means that managed futures are a prime choice for portfolio diversification, since they can generate returns even while other elements in the portfolio aren’t. Including managed futures in a portfolio also provides a stabilizer against volatility, stabilizing returns.
“The combined portfolios of stocks after including judicious investments in managed futures accounts show substantially less risk, at every possible level of expected return, than portfolios of stocks (or stocks and bonds) alone."
Dr. John Lintner, Harvard University, 1983
Managed futures strategies enable well diversified funds of funds
Known for their role in helping portfolio diversification, managed futures are even diverse amongst themselves. There are several different strategies that managed futures managers can follow. Here are some of the most important managed futures strategies:
Trend Following
Trend followers take systematic approaches at trading. They use computer systems and complex mathematical models to identify and take advantage of trends in commodity prices.
Short Term Trading
Short term trading strategies seek opportunities for short term profits. Like trend followers, they often use automated systems and extensive mathematical models to execute their trades.
Discretionary Trading
Discretionary trading strategies base their decisions on the manager’s expertise and experience, instead of mathematical signals calculated by a computer. These strategies can get involved in any sort of market or financial instrument.
Global Macro
Global macro strategies use macroeconomic indicators, events and data to make decisions about their global investments. They invest in different markets and securities across the world.
FX Trading
FX traders trade currencies to generate their returns. There are many different currency markets across the globe that trade tons of different currency pairs.
This wide array of various strategies provides significant variation under managed futures themselves, giving a wide selection for investment options, and creating excellent opportunities for funds of managed futures, such as the HI Varengold CTA Hedge.