Whether you’re an experienced investor in the field of alternative investments or just getting started, managed futures can be a complicated subject. We aim to make it as easy as possible to gain all the knowledge you need to start adding managed futures to your portfolio, so we’re assembling a comprehensive guide to everything there is to know about managed futures. So if you’ve read our three introductory articles, What Are Managed Futures, How Do Managed Futures Work, and Why Managed Futures and you still have questions, consider this your ultimate reference! And be sure to check back, as we are continually working to add to and improve this guide. If there are any topics you don’t see here that you’d like us to add, please contact us and let us know!
Managed Futures Basics – What You Need To Know First
Know what you’re getting into before you start investing. Understanding minimums, how investments are funded, different fee structures, and the different types of CTAs is critical to making sure your managed futures investments are set up for success.
- What minimum investment do I need?
- What Is A Disclosure Document?
- All About Fees
- Regulations and Certifications
Important Managed Futures Terminology
These terms should be familiar to seasoned investors, but if you really want to personally dig into the performance of the CTAs you’ve invested in, make sure you understand these common performance metrics and how to use them.
- Average Price System, or APS Pricing
- Return on Margin
- Notional Funding
- Standard Deviation vs Downside Deviation
- The Sortino Ratio
- Value Added Monthly Index (VAMI)
- 9 Managed Futures Terms Investors Should Know
Portfolio Building Theory
Feeling confident enough to take a more active role in choosing your portfolio? In this section, learn more about the ins and outs of managed futures portfolio building, including advanced CTA analysis, how to analyze the composition of your CTA portfolio, and how to balance your managed futures investments with all of your other investments.
Frequently Asked Questions (FAQs)
The term managed futures usually refers to the industry of professional money managers known as Commodity Trading Advisors (CTA) but may also be associated with commodity funds or futures funds (commodity pools). These advisors manage client assets using global futures and options markets as trading vehicles for their clients. They have the ability to take both long and short positions to provide investment opportunity to clients throughout market cycles. Managed futures offer investors direct exposure to international financial and non-financial asset sectors that include grains, meats, softs, currencies, financials, energies, and metals. While traditional money managers implement long-only techniques to drive client return, CTAs have a broader toolkit of investment options at their disposal.
Although managed futures have been a part of the financial services industry for several decades, their popularity has recently increased as more investors realized their benefits. The impressive transparency and liquidity of managed futures has been viewed as an increasingly important benefit. Other benefits of managed futures are: opportunity for enhanced returns, increased diversification compared to traditional investments, lower total portfolio risk (including volatility), and potential to profit throughout market cycles (a product of low correlation and exposure to multiple markets). Please keep in mind that past performance is not indicative of future results and managed futures involves substantial risk of loss.
Managed futures may be appropriate for investors looking for greater diversification of their traditional portfolios with a long-term investment horizon. Managed futures can help investors gain exposure to markets and strategies that are uncorrelated with traditional asset types. They can also provide insight into the trading of a professionally managed account. In addition, institutional investors such as pension funds, endowments, and family offices are increasingly allocating capital to managed futures. However, managed futures may not be right for everyone, and it is important for an investor to understand all the risks involved before investing in managed futures.
Managed futures are not a short-term investment. It is important to note that managed futures should be considered a long-term investment and one that should be added to a traditional portfolio for greater diversification. This is primarily due to the cyclical nature of markets, which affects all investments. Even managed futures programs that are very successful have periods of losses or “draw-downs.” This is why it is recommended that managed accounts be maintained for at least one year and ideally for at least a three-year commitment. They should not be viewed as short-term investments or something that should be traded in and out of quickly.
CTAs are regulated by both the federal Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), which is a congressionally authorized, self-regulatory organization within the futures industry. All CTAs must be registered with the CFTC, and those managing customer accounts must be members of the NFA. The NFA and CFTC do not verify trading performance, and registration in no way means that the CTA’s documents have been “approved.” For more information, please visit www.cftc.gov and www.nfa.futures.org.
(1) If the investor is placing capital with a CTA in a managed account structure (also known as a SMA), the capital is deposited with a futures clearing merchant (FCM) and maintained in the direct name of the customer. (2) If the capital is being placed with a CTA that is offering investment through a fund structure, or a fund of funds, then the capital is given to the fund (or the fund of funds) and is held in the funds name.
CTAs report performance net of all commissions and fees. Performance figures are commonly found in the CTA’s Disclosure Document and marketing materials. Customers will also receive confirmation and monthly statements from their futures clearing merchant (FCM) showing all activity in their accounts.