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What Are Managed Futures?


Investing in futures is a way to benefit from stock market movements without actually owning a particular security. Managed futures is considered an alternative investment strategy that can be used as a hedging tool within a portfolio. Though there are several benefits to investing in managed futures, it’s not necessarily right for everyone. If you’re thinking about adding managed futures to your portfolio, here’s what you need to know. Before investing you may want to consult with a financial advisor to make sure it’s the right choice for your portfolio.

Managed Futures, Defined

Generally speaking, managed futures refers to investing in futures under the guidance of an active fund manager. If you work with a professional money manager, also known as a commodity trading adviser (CTA), they’ll oversee futures contract investments on your behalf. CTAs determine whether to take a long or short position in futures contracts based on the risk-and-rewards profile of the investment.

Managed-futures investing is generally classified as a hedging strategy, in that fund managers or CTAs attempt to hedge against stock market volatility to deliver the best returns possible. CTAs can use fundamental analysis or technical analysis (or a combination of the two) to decide which futures contracts to invest in at any given time.

How Managed-Futures Investing Works

In managed-futures investing, the fund manager is responsible for creating a diversified portfolio of futures contracts that can cover a variety of asset classes, including:

  • U.S. treasury notes or bonds
  • Commodities, such as soybean, coffee and sugar futures
  • Foreign currency
  • Stock index futures, such as the S&P 500

Fund managers can take different approaches to manage the various futures contracts in a portfolio. For example, some CTAs focus on systematic trend following in which they rely on technical analysis to spot pricing trends that have the potential to yield profits. Other CTAs might use algorithms or other discretionary methods to decide what to invest in and what position to take.

Keep in mind, though, that while managed futures appear similar to mutual funds or exchange-traded funds (ETFs), they’re actually very different. Though both give you exposure to a basket of investments, managed futures accounts are not funded with pooled money like a mutual fund or an ETF. In contrast, CTAs build portfolios based on an individual client’s preferences, needs and objectives.

The Pros of Investing in Managed Futures

While investing in managed futures is a bit more complex than simply buying stocks or mutual funds, they do offer some advantages, including:

  • Diversification: Managed futures is one way to add an alternative asset class to your portfolio. They typically have a low correlation to traditional asset classes, such as stocks, bonds or even real estate, which can help to balance out risk in a portfolio.
  • Volatility hedge: Volatility is natural as the stock market moves in cycles. By adding hedging strategies, such as managed futures, you can construct a portfolio that’s better equipped to ride out the occasional ups and downs.
  • Return potential: Managed futures can increase a portfolio’s overall returns, provided the fund manager uses a sound strategy for investing. At the same time, managed futures can also continue to deliver strong returns through bear and bull market cycles over the long term as well as in periods of market decline.
  • Liquidity and transparency: The more liquid an investment, the easier it is to access the money you’ve put in should you need it. Compared to mutual funds or even ETFs, managed futures tend to be highly liquid. They’re also more transparent in the sense that you can review the underlying futures contracts and know exactly how your fund manager is investing.
  • Highly regulated: Even though managed futures is an alternative investment strategy, that doesn’t mean it’s unregulated. CTAs are subject to strict regulatory requirements, which can be reassuring to a beginning investor who’s dipping a toe in for the first time.

The Cons of Investing in Managed Futures

As with most things in life, it’s important to weigh the potential downsides of any venture. When it comes to investing in managed futures, that includes:

  • Risk profile: Managed futures investing — and futures investing in general — are speculative, which makes them higher risk than simply picking a stock or fund. While managed futures can mitigate some of this risk by increasing diversification, it’s still a risky strategy overall that may not appeal to more conservative investors.
  • Loss potential: The success of any managed-futures investment rests largely with the CTA that’s directing investment decisions. While managed futures can be highly profitable for investors, there’s also a very real chance that you could lose a substantial amount of money if the CTA’s investment strategy doesn’t pay off.
  • Cost: Typically, CTAs charge around 2% annually in fees for managing client accounts. If you’re getting great returns with managed futures, that may not matter much. But if your CTA’s performance record isn’t stellar, then 2% can seem like quite a lot compared to the 1% fee that financial advisors typically charge for their services.

How to Invest in Managed Futures

The easiest and most cost-effective way to add managed futures to your portfolio may be to do so through a managed-futures mutual fund or ETF. By investing in funds, you get access to a collection of managed-futures investments in a single vehicle. You can easily diversify without having to work directly with a fund manager to make investment decisions.

The key difference between managed-futures mutual funds and managed-futures ETFs has to do with how they’re traded. ETFs trade on an exchange just like a stock; mutual fund prices are settled once per day at the end of closing. ETFs can also be more tax-efficient, since the underlying investments typically turn over less often, meaning fewer capital gains tax events.

When evaluating managed-futures funds or ETFs, pay attention to what the fund invests in. Check the underlying investments to see which sectors are represented, then consider how that lines up with your diversification needs, risk tolerance and investment goals.

Next, consider the cost. With a mutual fund or ETF, the biggest cost to focus on is the expense ratio. Your expense ratio reflects how much you’ll pay to own the fund annually, expressed as a percentage of assets. Ideally, you want to look for funds that have lower expense ratios since this means paying less in fees.

Finally, check the fund’s performance to get a general sense of the returns it’s delivered to investors in the past. Just remember that past returns are not necessarily an indicator of future performance.

The Bottom Line

Managed futures may be new territory for most everyday investors, but it’s a strategy to consider if you’re interested in diversifying your portfolio. Your best bet? Take the time to thoroughly research both the pros and cons of any new investments, including managed futures, before you take the plunge.

Tips for Individual Investors

  • Consider working with a financial advisor to determine whether managed futures is the right move for you. Your advisor can explain the finer details of how managed futures work and what you should consider before investing. Finding a financial advisor doesn’t have to be hardSmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re more of the hands-on type, you can trade futures contracts directly through an online brokerage account. If you do go the DIY route in trading futures contracts, remember to factor in any commission fees you might pay. While many online brokerages now offer commission-free trades, this may only extend to individual stocks or ETFs.

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