A Balanced Approach

Now that people are done stuffing their bellies over the Thanksgiving weekend, it’s important to shift our attention to two very important items:

  1. Holiday shopping
  2. Financial planning for the new year

While we can’t be much of a resource in completing people’s holiday lists, we can assist in mapping out the 2013 direction of investors’ alternative investments – specifically managed futures.  Looking ahead to the new year, our philosophy as a firm remains unchanged: we’re not here to predict economic trends, and determine, which CTAs we feel will fare better in those environments.  Instead, we continue to stress the importance of having a balanced basket of non-correlated commodity trading advisors.

A balanced managed futures portfolio is no different than the recipe that creates your favorite Thanksgiving dish – too much or too little of any ingredient, and the results could be detrimental.  A few of our newsletters in the past have covered the opportunities that different managed futures strategies provide, such as the opportunities of selecting a discretionary versus systematic manager and/or selecting a fundamental versus technical manager. Each type of strategy has a place in everyone’s overall managed futures portfolio, but the most important question to ask is how they fit together? Or rather how would an investor  weigh their managers in an overall portfolio of CTAs to gain the greatest amount exposure while maintaining risk? A very convoluted question, indeed. Here are our thoughts…

The answer to the above questions is simple: there is no answer.  Each investor’s situation is unique, and that is why no two clients’ portfolios are ever the same.  Factors such as, investment amount, risk-appetite, return goals, cash needs..etc. make it difficult to construct identical portfolios for two different investors.  So how do we approach portfolio construction for each client? We focus on what we consider to be three broad managed futures categories, and capture a portion of each.



Trading Style

Trading style refers to the type of technique employed by the commodity trading advisor, which can be either systematic or discretionary. While many of the CTA’s in the managed futures space fall under being systematic or discretionary, a large amount are a combination of the two styles. While discretionary managers have performed slightly better over the last few years, and therefore, get more weighting, systematic managers still serve an important role in portfolios.  Both types of styles are a necessary component when balancing out portfolios over an economic cycle.


Market Sectors Traded

Market sectors traded is simple to understand.  We do not want all CTAs in a portfolio to trade the same market sector; Grains, for example.  Ideally, you would want each CTA in your portfolio to focus on a different market sector, which include: Financials, Metals, Livestock, Grains, Energies, Softs, Currencies…etc.  When a managed futures portfolio grows larger (approaching ten or more CTAs), you can then have multiple CTAs focusing on the same market sector. There are also CTAs that focus on multiple market sectors, which also provide a unique edge. Please keep in mind that if your portfolio contains five or less CTAs, and more than one CTA trades the same market sector, it’s probably because each of those two CTAs has a different investment strategy.


Investment Strategy

Investment strategy is the most complex category as it contains many different subcategories and because most managers do not generally fall under one. Some of the subcategories include: technical, fundamental, short-term, mid-term, long-term, trend following, option trading, global-macro…etc. While it is nearly impossible to invest with a CTA to satisfy each type of investment strategy, you can many times expose yourself to multiple investment strategies by investing with CTAs that are hybrids of multiple strategies. For example, a CTA could be a short-term, technical trader.

Going back to the recipe example from earlier, the same way you wouldn’t eat salt on its own is the same reason why you would not focus on any single trading style, market sector, or investment strategy.  It may prove successful over the short-term, but will not leave a good “taste” in your mouth over the long-run. Having a healthy mix of various CTAs is how aiSource approaches portfolio construction for all of our clients.

Disclaimer: Please use the above material strictly for educational purposes. Past performance is not indicative of future results. Futures trading involves substantial risk of loss.  By no means is this newsletter offering any investment advice or suggesting to make any trade recommendations. Please consult an aiSource advisor prior to opening any managed futures accounts.