Managed Futures Explained
Managed futures represent an alternative investment strategy involving a portfolio of futures contracts managed by professional investment managers. As a diversification tool, managed futures offer exposure to various asset classes, such as commodities, energy, and currencies, thus helping to mitigate risks in a traditional portfolio of stocks and bonds.
Not Just Your Average Hedge
Managed futures come into the spotlight as a more transparent and regulated alternative to hedge funds. Utilized mainly by large funds and institutional investors, these instruments provide portfolio and market diversification not typically achievable through direct capital investments.
Key Takeaways
- Alternative Investment Vehicle: Managed futures comprise a portfolio of futures contracts managed by expert strategists.
- Diversification and Risk Management: They offer portfolio diversification, mitigating risk via exposure to asset classes with weak or inverse correlation to traditional stock and bond markets.
- Strategic Approaches: Common strategies in managed futures trading include the market-neutral and trend-following strategies.
Mastering Managed Futures Strategies
Market-Neutral Strategy
Focusing on spreads and mispricing arbitrage, the market-neutral strategy aims to profit by maintaining balanced long and short positions across various industries, trying to capture profits from price movements in either direction.
Trend-Following Strategy
This forward-looking strategy entails going long or short based on fundamental or technical signals, eyeing profits from the trends in market prices. Trend followers adapt to the market’s movements, strategically entering trades to align with perceived directional trends.
Regulation and Reliability
Originating from the 1970s Commodity Futures Trading Commission Act, managed futures hold a significant presence in regulated investment circles. Managed by registered Commodity Trading Advisors (CTAs) under stringent oversight by the Commodity Futures and Trading Commission (CFTC) and the National Futures Association (NFA), these investments assure institutional investors transparency and compliance.
Dive Deeper with Disclosure Documents
For potential investors, acquiring disclosure documents is critical. These documents provide a clear picture of the trading strategy, historical performance, and managerial acumen, offering a transparent view of the investment’s potential returns and associated risks.
Related Terms
- Commodity Trading Advisor (CTA): Licensed professionals who manage commodity and futures contracts portfolios.
- Futures Contract: An agreement to buy or sell a specific commodity or financial instrument at a predetermined price at a specified time in the future.
- Portfolio Diversification: The practice of spreading investments among various financial instruments to reduce risk.
- Hedge Fund: An alternative investment vehicle available primarily to sophisticated investors, such as institutions and individuals with significant assets.
Recommended Further Reading
- “Following the Trend: Diversified Managed Futures Trading” by Andreas Clenow
- “Managing Futures – Strategy, Insights, and Techniques for Futures Trading” by Salil Donde
- “A Complete Guide to the Futures Market” by Jack D. Schwager
Embrace the world of managed futures for a well-rounded approach to investment diversification. With expert management and strategic trading, these tools can serve as a critical part of a modern investor’s portfolio.
