Risk and Return: Considerations for Investing in Managed Futures Waterville ME

Some investors are looking for alternative assets to diversify their holdings after taking a beating in the markets last year, and others need to rebalance their portfolios to account for changes in their asset allocation over time. One investment that might provide a vehicle for diversification and enhanced returns is managed futures funds. Some of these funds offer lower minimums for retirement accounts and are available through self-directed individual retirement accounts (IRAs).

The managed futures industry has been around for about 30 years. It is made up of commodity pool operators who form limited partnerships that provide investment vehicles for individuals and institutions. The fund’s investment decisions are made by commodity trading advisers (CTAs) who generally use a proprietary system or theory to invest a portion of their assets in derivatives (futures, forwards and options) across a wide variety of segments. The remainder is put into Treasury bills or other extremely safe investments that essentially serve as collateral so that the fund will have the capital to fulfill its obligations under the derivatives it invests in.

Most managed futures funds invest across six major sectors: energy, precious and base metals, grains and other commodities, foreign currency, global fixed income and stock indices. Because their reach is so broad, their correlation to the two main asset classes – stocks and bonds – is quite low, and therefore they can be expected to behave differently from those investments in most economic climates. They also tend to be extremely well diversified, with investments in commodities, metals, and currencies as well as securities. This diversification helps them do well in both up and down markets.

A typical managed futures portfolio could have exposure to more than 50 global markets at a single time, according to Robert L. Lerner, chief executive officer of Ruvane Fund Management, a commodity pool operator based in Princeton, N.J. “The word ‘commodity’ is somewhat misplaced because managed futures funds and their CTAs invest in a wide variety of markets,” Lerner said. For example, many invest in derivatives based on securities and fixed income investments as well as those based on commodities.

The diversification and noncorrelation that managed futures funds bring to a portfolio have the effect of lowering the overall risk of the portfolio. Studies have shown that, when adding risk into the mix, a portfolio with 10 percent of its assets invested in managed futures, 55 percent in equities and 35 percent in fixed income can be expected to have higher risk-adjusted returns than one invested 60 percent in stocks and 40 percent in bonds.

While they tend to lower the risk of an overall portfolio, managed futures investments can involve significant risk because they are speculative and volatile. Therefore, as with any inve...

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