What Is a Managed Futures Account?

A managed futures account is a type of alternative investment vehicle. It is similar in structure to a mutual fund, except that it focuses on futures contracts and other derivative products.

In the United States, providers of managed futures accounts are regulated by the Commodity Futures Trading Commission (CFTC) as well as the National Futures Association (NFA).

Key Takeaways

  • A managed futures account is a type of investment fund that holds derivative securities.
  • It is regulated by the CFTC and NFA, and its investment managers face additional oversight.
  • The demand for managed futures accounts has grown in recent years, with assets under management (AUM) approaching $400 billion as of 2018.

Understanding Managed Futures Accounts

Managed futures accounts are investment vehicles that hold positions in derivatives, such as commodity futures, stock options, and interest rate swaps. Unlike more mainstream investment funds, managed futures accounts are permitted to use leverage in their transactions and can also take both long and short positions in the securities they trade.

Because of this added level of complexity, managed futures accounts are managed by specialized investment managers called Commodity Trading Advisors (CTAs). These professionals hold special designations which authorize them to trade in derivative securities. Although CTAs typically trade on behalf of individual clients, other investment managers— known as Commodity Pool Operators (CPOs)—invest in derivatives on behalf of a large group, or "pool," of investors.

Both CTAs and CPOs are required to register with the CFTC before accepting clients' funds. Additionally, they must pass extensive FBI background checks and file ongoing disclosure documents as well as annual audited financial statements. These financial disclosures are then reviewed by the NFA, the national self-regulatory organization (SRO) of the U.S. derivatives industry.

Proponents of managed futures accounts argue that they can reduce portfolio volatility and offer greater capital efficiency due to the leverage that they permit. Moreover, because managed futures accounts can adopt both long and short positions, they can enable investors to generate profits in both bull or bear markets. Lastly, derivative investments can provide high levels of diversification through exposure to market sectors, such as commodities, currencies, and other financial instruments.

Detractors, on the other hand, cite the relative lack of long-term performance data on managed futures accounts and the relatively high fees that these accounts often entail. Typically, these fees are comparable to those of the hedge fund industry, where the "2 and 20" fee structure (a 2% asset management fee combined with a 20% performance fee) is commonplace.

Real World Example of a Managed Futures Account

Managed futures accounts have seen increased institutional use in recent years. In the first quarter of 2018, total funds managed by the CTA industry were reported at $367.3 billion, according to figures published by Barclay Hedge Fund.

Globally, it is difficult to overstate just how large the derivative markets have become. According to data from the Bank for International Settlements (BIS), the total notional value of derivative contracts worldwide is over $500 trillion, or over six times the entire world's gross domestic product (GDP).

With that in mind, it is hardly surprising that a growing number of investors are pursuing investment opportunities within the derivative marketplace.