Managed futures refers to an investment where a portfolio of futures contracts is actively managed by professionals. Managed futures are considered an alternative investment and are often used by funds and institutional investors to provide both portfolio and market diversification.
Managed futures provide this portfolio diversification by offering exposure to asset classes to help mitigate portfolio risk in a way that is not possible in direct equity investments like stocks and bonds. The performance of managed futures tends to be weakly or inversely correlated with traditional stock and bond markets, making them ideal investments to round out a portfolio constructed according to modern portfolio theory.
Many individual and institutional investors search for alternative investment opportunities when there is a lackluster outlook for U.S. equity markets. As investors seek to diversify into different asset classes, most notably hedge funds, many are turning to managed futures as a solution.
One of the major arguments for diversifying into managed futures is their potential to lower portfolio risk. Such an argument is supported by many academic studies of the effects of combining traditional asset classes with alternative investments such as managed futures.
Taken as an alternative investment class on its own, the managed-futures class has produced comparable returns in the decade before 2005. For example, between 1993 and 2002, managed futures had a compound average annual return of 6.9%, while for U.S. stocks (based on the S&P 500 total return index) the return was 9.3% and 9.5% for U.S. Treasury bonds (based on the Lehman Brothers long-term Treasury bond index). In terms of risk-adjusted returns, managed futures had the smaller drawdown (a term CTAs use to refer to the maximum peak-to-valley drop in an equities' performance history) among the three groups between January 1980 and May 2003. During this period managed futures had a -15.7% maximum drawdown while the Nasdaq Composite Index had one of -75% and the S&P 500 stock index had one of -44.7%.
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