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Managed Futures | Trade Futures

The concept of combining non-correlated asset categories to achieve portfolio diversification and reduce overall risk is the bedrock of modern portfolio theory. Adding managed futures to a portfolio of traditional investments can provide many benefits that enhance overall performance. Some of the benefits of managed futures include:

Portfolio Diversification:

Modern portfolio theory emphasizes the benefits of diversification, and professional investors in increasing numbers are turning to alternative investments with low or negative correlation to traditional investments (such as equities, fixed income securities and real estate).

Global Investment Opportunities:

Due to the broad scope of exchange traded futures, the managed portfolio that includes these instruments gains global diversification by allowing investors access to overseas stock and bond markets, as well as foreign currencies.

High Return Potential:

Managed futures can generate returns which often exceed the returns on traditional investments. Studies published by the National Futures Association have shown that managed futures have yielded greater gains in average inflation years, and even larger gains in high inflation years.

Ability to Profit from Down Markets as well as Up Markets:

Similar to hedge funds, managed accounts, and commodity pools enjoy the ability to take short positions (i.e., sell futures contracts), thereby profiting from subsequent price decline. In other words the ability to go short is as simple as going long (i.e., purchasing futures contracts in anticipation of profiting from subsequent price advances).

Hedge against Inflation and Deflation:

Since futures trading can be profitable during times of rising or falling prices, managed futures can serve as an ideal hedge during times of economic uncertainty or decline.

Liquidity:

Unlike other investments, such as real estate or thinly traded stocks or bonds, investments in managed futures are structured to be highly liquid, allowing investors to easily add or withdraw assets.

Leverage:

The most attractive characteristic of futures trading is leverage. The relatively low initial investment allows most of the account to earn interest in U.S Treasury Bills.

Over the past 10 years, performance of managed futures has compared favorably with that of U.S stocks and bonds and international stocks as well, even though stocks have recently enjoyed a tremendous bull market. The following table demonstrates annual returns from 1985 through 1994 (inclusive) for various asset classes. Stocks return is measured by the S&P 500 Index, with dividends reinvested. Bond returns are measured by Lehman Brothers Government/ Corporate Bond Index (over 1 Year), with coupons reinvested. International stock return is measured by Morgan Stanley, with dividends reinvested. Managed Futures return is measured by the TASS CTA Index

See also  Box or Conversion | PFG Futures

Managed U.S Stocks Int’l Stock Bonds

Year Futures % (S&P 500) % (EAFE Index) % %

1987

57.30

5.25

-3.40

2.29

1988

21.80

16.61

32.00

7.59

1989

1.80

31.69

20.00

14.23

1990

21.00

-3.1

-31.00

8.29

1991

3.70

30.47

6.80

16.13

1992

-.90

7.62

-8.00

7.58

1993

10.4

10.08

27.20

11.06

1994

-.70

1.32

-3.40

-3.51

1995

14.40

37.6

7.70

19.20

1996

9.20

23

9.6

2.90

* Source: Managed Futures Association March 1997

 

Managed Futures performance compares well with that of stock and bonds over the long term (1987-1996). The following table shows compound average annual return from January 1987, through 1996.

Compound Return

Managed Futures % U.S. Stock % Int’l Stock % Bonds %

* Source: Managed Futures Association March 1997

Outlook for Futures

What does the future hold for Managed Futures?

The past decade has been witness to tremendous growth in funds committed to managed futures. Institutional and private investors alike have become aware of the benefits associated with an investment in managed futures: access to foreign markets and commodities, the ease of going short to benefit from general price declines, enhanced returns and reduced portfolio risk, and the liquidity associated with global futures markets.

There is mounting evidence that including futures in an investment portfolio can improve total returns while lowering overall risk. A study by Harvard Business School professor John E. Lintner found that including futures in an investment portfolio “reduces volatility while enhancing return and that such portfolios have substantially less risk at every possible level of return than portfolios of stocks or stocks and bonds”. A similar analysis by Managed Accounts Reports, a firm that tracks investment performance, found that portfolios with as much as 20% of assets in managed futures yielded up to 50% more than stock and bond portfolios having comparable risk.

A study published in the Wall Street Journal on December 10, 1990, showed how the addition of managed futures to a conventional portfolio of stocks, bonds and treasury bills increased return and reduced overall risk. The conventional portfolio had a five year average annual return of 11.6% and a maximum drawdown (worst high to low equity decline) of 6.2%. With managed futures, included overall portfolio return was increases to 14.4% and the maximum drawdown was only 4.9%.

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