November 29, 2018

Managed Futures Investments

Why its an important assest class

Today’s ultra-low interest rate environment makes investment returns outside of the stock market slimmer than historical standards. While interest rates in the U.S. are creeping back up, don’t expect annual returns on any interest-bearing securities to rise above 5% anytime soon. While the U.S. economy is humming along at its best clip in many years, the Federal Reserve is intent on keeping annual inflation around 2%. That means if the Fed is successful, bonds, annuities and money market certificates will continue to offer only modest investment returns, making a valid argument for managed futures investments.

While the stock market has offered the best overall investment returns historically, including the past few years, have you recently examined a longer-term chart for the S&P 500 stock index? Most professional technical chart analysts and even many fundamental stock market analysts will tell you the chart suggests the years-long bull run in equities is at the least very mature and in its latter stages, and at worst a way overdone asset class that is ripe for a major downside correction, if not even a downright bear market, that will arrive at any time.

Enter managed futures Investments, or “funds” as they are called in the futures industry, as an investment asset class. Just what are the “funds?” They can come in several forms, but usually it’s a large pool of investor money (funds) that is managed by a single entity, such as a Commodity Pool Operator (CPO) or Commodity Trading Advisor (CTA). The CPO or CTA then trades futures contracts with the goal of gaining the best annual return on that money possible. Sometimes these funds are also called hedge funds.

Most investors do not put a large portion of their investment portfolio into managed futures. However, the recent resurgence of crude oil prices and other raw commodity markets, including higher price volatility in many futures markets, has once again piqued interest of the general investor.

Even a small percentage of one’s investment portfolio put into managed futures can add up to gains for the investor. Reason: The higher volatility in futures markets prices—both on the upside and downside—can present the professional managed futures advisor with bigger profit opportunities. Of course, it stands to reason that bigger profit opportunities also correspond to larger risk for the investor. That’s why investors usually allocate a smaller percentage of their portfolio to managed futures.

Generally speaking, the managed futures advisors are trend-following traders who use a shorter-term timeframe to trade futures. In other words, these traders are not “buy and hold” traders. Many tend to use moving averages as a major trading tool, or some type of mechanical trading system. Either way, these traders rely on technical analysis for the vast majority of their trading decisions. The funds like to see a market start to “lean” one way, and then pile on positions in favor of the way the market is leaning.

A newer form of the “funds” is the index funds. This is a large pool of investor monies that tracks some sort of commodity index, such as the Goldman Sachs Commodity index. The difference with the index funds is that they have more of a “buy and hold” strategy and a longer-term trading timeframe. Also, the index fund managers do not sell, or go short, the futures markets like other commodity fund managers have the option of doing. The index funds only go long, including rolling futures contract positions forward on the long side when the contracts are about to expire or go into the delivery period.

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