Debunking Managed Futures Myths

Aug 13, 2014 2:12:00 PM

Managed futures are quickly becoming more attractive for investors seeking to diversify their portfolios. According to BarclayHedge, this sector is the fastest growing based on assets under management; however, you may have heard some myths about managed futures trading. Before you find a CTA and dive feet first into this type of investment, it is important to clear up these rumors so you can make the best decisions for your money.

They Are Not a Traditional Asset Class

CTAs use a variety of strategies when making their investment decisions, including long, short, or a combination of long and short approaches. They also work with a wide mix of different commodities and currencies. In fact, there many different strategies some which are 100% quantitative and some that require 100% discretion and of course everything in between.

By definition, asset classes that trade on regulated exchanges have similar characteristics and are subject to many of the same laws and regulations. This makes their past performances much easier to compare due to these common attributes. Because futures are essentially an eclectic mix of different strategies and market decisions, the strategies are not as easily understood. For example, a long only stock portfolio is easy to understand because it makes money only when stock prices go up. Some managed futures strategies are designed to make money when stock prices go down, or even more complicated such as statistical arbitrage which can make money by trading the same stock at different prices on different exchanges.

They Can be a Hedge Against Equities

Some investors looking to diversify their portfolios use managed futures to provide steady returns even while equities are declining. Most futures tend to be non-correlated to equities and therefore their returns are actually independent of equity performance. The futures trading industry is almost completely independent and does not often move in the same direction as normal stocks. In the past, futures have provided stable performance during both times of market advances and declines, which makes managed futures a great option for those looking to diversify their investments.

Not All Futures Are Equal

One of the most important advantages of futures trading is the incredible range of opportunities they provide for managers and investors. Because CTAs deal in a variety of different sectors using many different strategies, it increases your ability to manage the risk/return characteristics of your portfolio. How?

• Not all CTAs will trade in the same markets. Some may focus on only one strategy or sector while others combine both strategies and sectors.
• Managers often use many different time horizons. Some trade both long and short positions, while others might focus on global macro strategies.
• Commodity trading advisors often use proprietary approachs when managing risk, leading to further deviations between managers.

Managed futures provide investors the opportunity to truly diversify their investments by using a variety of strategies. Although they do carry their own unique set of risks, futures trading is a rapidly growing option for investors.

If you need help exploring solutions that best match your objectives, contact us. We provide strategies and refedrences help you make the most informed decisions for your investment portfolio.