Managed futures strategies encompass a variety of active investment approaches expressed through the liquid and transparent exchange-traded futures and foreign exchange markets. Options on these contracts may also be utilized. The $300 billion+ managed futures industry is comprised of professional investment managers, commonly referred to as Commodity Trading Advisors (CTAs), who actively manage positions across a wide variety of global markets and sectors.
Managed futures as an investment class offer investors a number of beneficial attributes. Dr. John Lintner first widely published several of these benefits in his seminal 1983 paper, “The Potential Role of Managed Commodity-Financial Futures Accounts (and/or Funds) in Portfolios of Stocks and Bonds.” In the paper, he concluded that every well-diversified portfolio would benefit from exposure to managed futures. Since Lintner’s study, considerable independent research has arrived at similar conclusions.
This article will address the key characteristics of managed futures that benefit investors and highlight the potential advantages of including managed futures in a diversified portfolio.
- Non-directionality: no directional bias; ability to profit from increasing or decreasing values/prices without restriction
- Non-correlation: historic returns exhibit low correlation to traditional and alternative asset classes
- Diversification: managed futures investments can be diversified across a variety of active investment approaches, sectors traded and trade duration
- Liquidity: deep, active futures and foreign exchange markets
- Transparency: intraday market-based pricing via futures exchanges and foreign exchange markets
- Cash efficiency: ability to increase exposure without borrowing (financial leverage).
In addition to attractive historical absolute returns, the managed futures industry, as represented by the iSTOXX Efficient Capital Managed Futures 20 Index, has also exhibited a low overall correlation to traditional assets such as stocks and bonds through a range of market environments. Managed futures have also exhibited a low overall correlation to other alternative asset classes including hedge fund strategies.