What are Managed Futures

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.

BREAKING DOWN Managed Futures

Managed futures have increasingly been positioned as an alternative to traditional hedge funds. Funds and other institutional investors often use hedge fund investments as a way of diversifying their traditional investment portfolios of large market cap stocks and highly rated bonds. One of the reasons hedge funds were an ideal diversification play is that they are active in the futures market. Managed futures have developed in this space to offer a cleaner diversification play for these institutional investors.

The Rise of Managed Futures

Managed futures evolved out of the Commodity Futures Trading Commission Act, which helped to define the role of commodity trading advisors (CTA) and commodity pool operators (CPO). These professional money managers differed from stock market fund managers because they worked regularly with derivatives in a way most money managers did not. The Commodity Futures and Trading Commission (CFTC) and the National Futures Association (NFA) regulate CTAs and CPOs, conducting audits and ensuring that they meet quarterly reporting requirements. The heavy regulation of the industry is another reason these investment products have gained favor with institutional investors over hedge funds.

How Managed Futures Trade

Managed futures can have various weights in stocks and derivative investments. A diversified managed futures account will generally have exposure to a number of markets such as commodities, energy, agriculture and currency. Most managed futures accounts will have a stated trading program that describes its market approach. Market-neutral strategies and trend-following strategies are two common approaches. The market-neutral strategies look to profit from spreads and arbitrage created by mispricing, whereas the trend-following strategies look to profit by going long or short according to fundamentals and/or technical market signals. Investors looking into managed futures can request disclosure documents that will outline the trading program, the annualized rate of return and other performance measures.