Why Investors Should Consider Investing in Managed Futures

By James Suh , Business Development at DarcMatter, CrowdFundBeat Guest Editor,

Garnering increased attention for their potential to provide absolute returns, commodity trading advisors (CTAs) have enjoyed a recent spike in asset growth over the years. Today, managed futures programs are too prominent an asset class to remain the domain of institutional investors. Below is a primer designed to help investors navigate the complex landscape of managed futures as well as evaluate the merits of adopting them for portfolio diversification purposes.

What Are Managed Futures?

Simply put, managed futures are a set of strategies that trade futures contracts and options in financial instruments and physical commodities. Managers of these strategies are called Commodity Trading Advisors (CTAs), and money managers required to register with the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) to manage or exercise discretion over customer accounts. The vast majority of CTAs – approximately two thirds – are systematic traders or trend followers, making extensive use of computer programs to forecast price direction and execute trades on various commodities, equity indices, or foreign exchange. Some CTAs rely on backward-looking and forward-looking signals to determine whether to buy or sell in certain markets, whereas others rely on relative price changes rather than directional trends. The number of trading strategies employed by managers have expanded greatly with the introduction of new trading technologies and methods of data analysis.

 

Managed Futures vs. Hedge Funds

Despite sharing numerous similarities with macro hedge funds, managed futures programs feature idiosyncrasies that are well worth understanding. To be fair, much of the confusion surrounding proper classification isn’t unwarranted, since both feature similar fee structures (2/20), tout non-correlation with traditional investments, follow trends, and often exploit fluctuating currency valuations. Consider famous examples such as Soros’ shorting of the British pound back in ’92, and in more recent news, a Carlyle hedge fund’s successful bet on the Chinese yuan’s devaluation. Neither were CTAs, but many of the tactics and instruments they employed overlap with those used by managed futures programs. Add to this the media’s frequent identification of managed futures as a subset of hedge fund strategies, and you have many reasons for conflating the two.

While some CTAs are indeed incorporated as hedge funds and exhibit characteristics associated with pooled investment vehicles, this is not always the case. One major structural difference between the two is that investors are able to invest in managed futures through individually managed accounts. In these instances, CTAs purchase securities on behalf of the individual investors, not on behalf of a fund. Thus, investors can specify whether to emphasize or exclude certain markets, view the trading activity of the account on a daily basis, and have much more control over the activities of the account. By extension, investors are able to liquidate their investments in as little as 24 hours, which may or may not be a significant benefit depending on the investor’s need for liquidity.

Additionally, as previously mentioned, CTAs offering managed futures programs are required to be registered with the CFTC and NFA, a requirement not imposed on hedge fund managers. As such, CTAs are subject to a unique set of rigorous reporting standards that ensure a degree of transparency to investors. That is not to say hedge funds lack reporting requirements altogether. Rules outlined in the Dodd-Frank Act impose reporting requirements to larger hedge funds that are registered.

 

The Managed Futures Industry Is Growing

The CTA industry has grown substantially in recent years, with assets under management jumping from $206 Bn in 2008 to just over $328 Bn in 2015 (YTD). Assets have grown nearly every year since 1980, when the managed futures industry stood at only $300MM.

Source: BarclayHedge

The sudden growth from 2008 onwards can largely be attributed to the impressive performance of managed futures in 2008’s market crisis. Managed futures were up 14% according to the Barclay CTA Index when the S&P 500 suffered heavy losses. This did not go unnoticed by institutional investors, such as numerous pension and endowment funds, who began allocating to CTAs in 2009.

 

Benefits of Including Managed Futures in Investment Portfolios

Managed futures programs have demonstrated many appealing features, delivering good returns in bear markets and remaining resilient in periods of market turmoil. Certain key traits can explain why this may be the case. Unlike stock and bond trading, which seek to profit from upward trends, managed futures programs have the ability to go short and profit when asset prices are trending down. This ultimately contributes to potential for low correlations to other asset classes. Moreover, systematic CTAs are able to limit exposure to behavioral risk or fear-based selling since very little manual intervention affects the programs that are already put in place. Given the aforementioned characteristics and a historically low correlation with traditional assets, managed futures can be a potent portfolio diversifier for investors seeking well-balanced portfolios.

Source: CME Group

 

Learn more about DarcMatter and request a demo.

DarcMatter is a technology platform providing enhanced capital connectivity between issuers and investors in the alternative investment space. VisitDarcMatter.com to start raising capital or get transparent access to alternative investment opportunities.

Tags: , , , , , , , ,

HEADLINE NEWS

This RSS feed URL is deprecated, please update. New URLs can be found in the footers at https://news.google.com/news [...]

Crowds to crowdfunding: Soccer ace targets fans' hearts and walletsReutersTifosy, the crowdfunding platform behind the deals, was founded by former Italy, Juventus and Chelsea striker Gianluca Vialli, along with a former Goldman Sachs banker and two other investors. The company [...]

CNBCSome crowdfunding donors could be accidentally breaking tax lawsCNBCDonors may face tricky gift-tax rules, non-deductible donations and a lack of accountability when contributing online.and more » [...]

The FederalistWhy It's Great News That Treasury Is Cutting Crowdfunding RegulationsThe FederalistSupporters of the free market and entrepreneurship should welcome these efforts, especially the reforms to the rules governing crowdfunding. One of the greatest innovations of the Int [...]

Financial TimesMonzo plans crowdfunding push to deepen ties with customersFinancial TimesBanking app Monzo is planning to launch one of the UK's largest crowdfunding efforts next year to give customers in the fast-growing bank what it calls “a greater share of ownership”. Tom Blo [...]

Crowdfunding New (Extraterrestrial?) TechnologiesInfoToday.comTTS Academy is taking advantage of the recent Security and Exchange Commission rules regarding crowdfunding for investors and promoting its organization as a Public Benefit Corporation. Second, its ultimate aim is to fund t [...]

Comics BeatCrowdfunding Watch: Corporate Magical Misdeeds, Norse Myths and Gamifying ComicsComics BeatIn this week's crowdfunding offering I humbly introduce you to a cartoon drawing tabletop game, a cinematic novel that takes you deep inside Norse mythology, and the second volum [...]

Bankless TimesThree excellent tips for success when crowdfundingBankless TimesSuccess in crowdfunding comes in different shapes and sizes. It could be successfully distributing thousands of products or finally having enough money to make that documentary that you've been working [...]

Business DayCrowdfunding grows in SA as a means for meaningful social changeBusiness DayCrowdfunding and fundraising platform BackaBuddy has become the first website of its kind in SA to raise more than R50m for its charities and campaigns.Crowdfunding platform raises R50 million via [...]

Program uses crowdfunding to support undocumented studentsDaily BruinThe Undergraduate Students Association Council's General Representative 1 Nicole Corona Diaz helped launch the #UndocuBruins campaign to fundraise $10,000 to go toward grants for undocumented students. (Eda Gokc [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |