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Managed futures represent an industry comprised of professional money managers (normally referred to as Commodity Trading Advisor CTA who manage client monies on a discretionary basis, using global futures and options markets.
Managed futures investments offer investors the following advantages:
1. The opportunity to make profits in both rising and falling markets.
2. Diversification across a broad spectrum of financial instruments and commodities.
3. The ability to use leverage to increase the profit potential of funds utilized.
Futures as a diversification
Managed futures with their ability to make profits regardless of the overall economic climate are a useful addition to any diversified portfolio and can be utilized not only to increase overall return but also to decrease risk.
The risks involved
By its very nature and the fact that it uses leverage futures trading is risky and only risk capital should be committed however the returns can be stunning with many managers achieving gains annually compounded 30 - 50% per annum.
What to look for when choosing a manager
In managed futures trading look for the following when choosing a manager:
1. A manager who has a track record of 3 - 5 years. This will show how good the manager is at handing the risk that is inherent in this type of trading. Keep in mind any manager can get lucky in the short term and this can yield big gains so performance has to judged longer term.
2. Look at the funds under management. Try and generally go with a manager that is used to handing at least 2 million as again it is easier to make money on smaller amounts of money
3. Try and get a manager that is NFA registered if you are using a Commodity Trading Advisor this gives you protection not only of your funds but also ensures that the manager does not earn brokerage fees and wont be tempted to simply churn your account to make money. CTA's are paid on management and incentive fees which means they have the same interest as you i.e. the growth of your funds
4. Do some homework and try and learn a little about your advisors background and philosophy of risk and go with your gut feeling of whether you think he is a person you want to trust your money with.
The A Good Reason To invest in futures
While hedge funds are the buzzword of the investment community today futures managers have been doing the same for decades. Just like hedge funds they can offer great growth rates and diversification.
In Modern Portfolio Theory they have been proved to increase overall returns while decreasing downside volatility which is something most investors are looking for.
Paradoxically By themselves futures are a high risk investment but combined
in a balanced portfolio they can reduce risk.
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