Commodity Futures Trading

Many individual and institutional investors search for alternative investment opportunities when there’s a disappointing outlook for U.S. Equity markets.

As financiers try to diversify into different asset sectors, mostly hedge funds, many are turning to managed futures as a solution. But instructional material on this alternative investment vehicle is not yet easy to find.

So here we offer a helpful ( kind of due diligence ) primer on the topic, getting investors started with asking the most relevant questions. The term “managed futures” is about a 30-year-old industry made from pro money managers called “Commodity Trading Advisor” ( CTAs ). CTAs must register with the U.S. Government’s Commodity Futures Trading Commission ( CFTC ) before they can offer themselves to the general public as money managers. CTAs also need to go thru an FBI deep background check, and supply comprehensive notification documents ( and independent audits of finance statements each year ), which the National Futures Association ( NFA ), a self-regulatory watchdog organization reviews.

CTAs often manage their customer’s assets employing an exclusive trading program or a discretionary strategy, which will involve going long or short in futures contracts in areas like metals, grains, equity indexes, soft commodities and foreign currency and U.S bond futures. During the past few years, cash invested in managed futures has more than doubled and will likely keep growing in the approaching years if hedge funds returns flatten and stocks underperform.

A key debate for expanding into managed futures is their potential to lower portfolio risk.

Supporting such a discussion are many educational studies of the results of mixing standard asset groups with alternative investments like managed futures. Dr John Lintner of Harvard University is maybe the most cited for his research in this area. Taken like an alternative investment class alone, the managed futures class has produced comparable returns in the decade before 2005. As an example, between 1993 and 2002, managed futures had a compound average yearly return of 6.9%, while for U.S. Stocks ( based mostly on the SP 500 total return index ) the return was 9.3% and 9.5% for U.S. Treasury bonds ( based mainly on the Lehman Bros long term Treasury bond index ). Re risk-adjusted returns, managed futures had the smaller drawdown ( a term CTAs use to refer to the maximum peak-to-valley drop in a shares ‘ performance history ) among the 3 groups between Jan 1980 and May 2003. In this period managed futures had a -15.7% maximum drawdown while the Nasdaq had one of -75% and the SP 500 stock index had one of -44.7%.

A further advantage of managed futures includes cutting risk thru portfolio diversification by negative relationship between asset groups. As an asset sector, managed futures programs are inversely related with bond certificates and stocks. For instance, during times of inflationary pressure, making an investment in managed futures programs that track the metals markets ( like silver and gold ) or foreign currency futures can supply a valuable hedge to the damage such an environment can have on stocks and bonds. To explain, if bonds and stocks underperform because of rising inflation concerns, some managed futures programs might outperform in these same market conditions. So, mixing managed futures with these other asset groups may get the most out of your allocation of investing capital.

Commodity trading carries risks and is not suitable for all investors. Past performance is not indicative of future results.