The benefits of managed futures have been widely documented for lowering the overall risk of an investment portfolio, while increasing the opportunity for higher returns. Institutional investors have made managed futures an increasingly popular investment class during the last couple decades because of this. However, managed futures are virtually unknown to the average investor.
The managed futures investment class is comprised of Commodity Trading Advisors (CTAs). They manage money for clients by trading in the futures markets. This covers a wide variety of commodities, equity indexes, financial instruments and currencies. The good thing about managed futures is that an investor doesn’t need to know how to trade the futures markets, rather what they need in a process for selecting a CTA or a portfolio of CTAs for an investment. A simplified approach is to research a CTA in a similar manner that an investor would research other investments.
Stock investors, for example, have 4,000 plus stocks to comb through on the major US exchanges and about 10,000 mutual funds and ETFs. That can take a great deal of screening and research to find stock investments that meet investor criteria. Fortunately, there is only a fraction of that amount of managed futures programs to research.
Similar to stocks, not all CTAs are the same and investors should seek a managed futures investment that has a good risk to reward profile and meets the investor’s criteria. One of the tools we use is Autumn Gold to filter and research CTAs. There are some 300+ CTAs in the database that report many criteria including monthly returns. Investors can also research CTA returns, drawdowns and trading philosophy.
Investors typically hold their stocks for a long period of time, as opposed to traders. This is a good way to look at CTAs. Even though CTAs actively trade the futures markets, an investor generally looks at the CTA as a whole.
They aren’t meant to be a short term investment, despite the liquidity of managed futures. CTAs and the markets go through ups and downs. Not every day or month will be positive. Every advisor will have losing days and winning days. This is similar to the stock market. It goes up on some days and down on some days. The long term trend is what is more important.
Looking at the CTAs track record over the last year, 3 years and possibly 10+ years for some CTAs gives an investor an idea of what the CTA has demonstrated in the past. There is no guarantee that a CTA will continue to be successful into the future even if its previous track record is very positive. However, it is probably a safer bet to choose a CTA with a positive track record than one with negative performance. Note: Past performance is no guarantee of future results.
An investor should also research the volatility of returns and how well the CTA has done under different market conditions. This all serves to help find a suitable managed futures investment that meets an investor’s risk/reward profile.
At Futuresbuzz, we provide these research services to our investors with no fee to the client. Many investors still like to know what they are investing in and get a better understanding of the investment. Taking this approach should help investors more easily relate to managed futures as an asset class and analyze CTAs for investment consideration.
