3 Mistakes Investors Make When Investing in Managed Futures

The team of advisors at aiSource speaks with many different types of investors each day. From individual investors to larger fund of fund clients, we see similar mistakes being made which forces investors out of the managed futures space and back into traditional assets. Below are three common mistakes we see when investors are looking to gain exposure to the managed futures space.

1) Investing in only ONE strategy

When aiSource first speaks with an investor we always preach diversification. Diversification not only outside of traditional assets, but also diversification within the managed futures space. Since each investors’ investment goals are different, aiSource carefully constructs customized managed futures portfolios to adhere to the investor’s goals. The portfolio of CTA managers will consist of different strategy types, along with access to various market sectors. Investors are reluctant to allocate a significant portion of their overall portfolio into alternatives, mostly because they are uneducated about the space and skeptical. Investors will say “since I am unfamiliar with the space and don’t have much experience, I only want to invest with one of the strategies that you showed me in the portfolio.” Investors will flock to the CTA strategy with the best performance and invest only in that strategy. With hundreds, if not thousands of different strategies within the managed futures space to invest in, investing with only one strategy and being profitable is similar to winning the lottery (you need to get lucky). The importance of investing in a portfolio of CTA managers is often overlooked, with investors assuming that any individual manager will be profitable month after month. However, it is inevitable all CTA managers will encounter losing periods or drawdowns, which is why diversifying into various strategies is important. As one manager struggles you are hoping the others are picking up the slack. 

2) Not Having Enough Capital

We’re sure you have seen the disclaimers everywhere stating that trading futures is not for everyone, and it really is the truth. Often times, individuals would like to gain access to the managed futures space with a small amount of risk capital to contribute. Although there are many CTA strategies with lower minimums, coming in with not enough capital forces the investor to invest in only one strategy. By investing in only one strategy, the investors performance in is tied down to the performance of that one specific CTA. Having more excess risk capital allows investors the ability to invest in a portfolio of CTA strategies, ultimately improving the odds of being profitable. Instead of investing in one CTA manager, its best to wait until you have enough risk capital set aside to invest in multiple managers, so that you have a diverse basket of CTAs. Another item to consider is drawdowns (or losing periods). Investors should consider drawdowns when investing, making sure they have enough capital to handle any losing period that CTA strategies may encounter. In short, be patient and wait to allocate to managed futures until you have enough risk capital to invest in multiple CTA strategies. 

3) Comparing Returns To The Equity Markets

The last most common mistake individuals make when investing in managed futures is that they compare managed futures performance too frequently to stock market performance.  While stock market performance is widely used as a benchmark to compare any investment, the current bull-run in the stock market would make it seem that no other investment is worthy.  Investors fail to remember that managed futures (and other alternative investments) are used to add diversification to an investment portfolio and not necessarily “compete” with the other assets in the portfolio.  While you never want a failing investment in your portfolio, it’s ok to have an investment that is underperforming the stock market, but still producing positive, non-correlated returns.  The role of managed futures and alternative investments will come into play as the stock market shifts into a bear market, which is when portfolios will rely more heavily upon alternatives to cover the slack.