What are Managed Futures?

traderkenny

Active member
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Managed futures describes futures trading accounts that give discretionary trading control to a professional money manager known as a Commodity Trading Advisor (CTA).

Managed Futures and the Diversified Portfolio

Managed futures money under management during the 1st quarter 2009 was $198.6 billion. Why are so many investors utilizing managed futures?

Managed Futures may potentially:

* reduce the risk of your portfolio,
* enhance your portfolio's return,
* provide profit opportunities in both rising and falling markets,
* provide an opportunity to participate in global markets.

Numerous studies have been conducted which have concluded that adding managed futures to a portfolio comprised of only stocks and bonds can reduce risk and yield higher returns. Please be advised that there is no guarantee that adding managed futures to one's portfolio will result in less risk or higher returns. These include studies by:

Dr. Harry Markowitz of The University of Chicago - winner of the Nobel Prize
Dr. John Litner of Harvard University
CME
CBOT
Yale University
University of Massachusetts
University of Pennsylvania: Wharton School of Business
Goldman Sachs

More and more people are utilizing managed futures. The main reason may be the abundance of academic and institutional studies which make clear the fact that managed futures may provide investors with vital risk management. Numerous studies indicate that a portfolio which includes managed futures can yield appreciably higher and more stable returns over time than a portfolio comprised of only stocks and bonds. Most importantly, the same evidence indicates that higher portfolio returns may potentially be achieved while at the same time reducing portfolio risk.

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Another factor in the growth of managed futures has been the tremendous broadening of futures markets beyond conventional commodities. This has created entirely new categories of investment opportunities. Today, futures traders can utilize stock indexes, debt instruments, and currencies. The increasingly global composition of today's futures markets has also expanded the realm of investment opportunities and strategies. Please be advised that trading futures and options involves substantial risk of loss and is not suitable for all investors. There are no guarantees of profit no matter who is managing your money.

CTA Information

Before considering a managed futures account, always evaluate the performance and disclosure documents available for each CTA to select one that is in keeping with your particular trading goals and risk tolerance level. Here are a few key areas upon which you should focus when researching CTAs.

Trading Program: Each CTA will have a different methodology for determining which trades to employ and may use technical analysis, fundamental analysis, or both. Many CTAs will focus on one sector of futures & options markets or futures contracts and may specialize in those alone. Others will trade across the spectrum of futures contracts and may even trade markets which are not familiar to you. Be sure that you are comfortable with the markets and techniques that the commodity trading advisors have selected. Many CTA managed futures programs have evolved primarily as option writing techniques, a method which you will want to confirm is appropriate for your account size and risk tolerance level with managed futures.

The large volume of paper that makes up a CTA's disclosure document will contain many important pieces of information for you. Make sure that you read disclosure documents carefully before committing to a managed futures account.

Fees: In addition to the exchange and brokerage fees associated with a futures trading account, you will need to investigate what incentive fees or managed account fees will be levied on your account by the CTA. These fees are included in detail in the disclosure document.

Drawdowns: Among the information in a disclosure document is the maximum peak to valley drawdown or the largest historical loss in the CTA's trading experience.

Annualized Rate of Return: This should be an up to date number representing the CTA's performance, and this number should be net of fees and other trading costs.
 

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