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Profit potential of managed futures by Mark Plummer
The term "managed futures" refers to a 30 year old industry made up of professional money managers who are known as commodity trading advisors (CTAs). CTAs are required to register with the US governments Commodity Futures Trading Commission (CFTC) before they can offer themselves to the public as money managers.
CTAs are required to go through an FBI deep background check and provide rigorous disclosure documents and independent audits of financial statements every year, which are reviewed by the National Futures Association (NFA), a self-regulatory watchdog organization.
Managed futures account is like a mutual fund, except that positions in government securities, futures contracts and options on futures contracts are used to manage the portfolio. CTAs look after managed futures accounts, deciding on their positions based on expected profit potential. Among other advantages, managed futures offer the potential for reduced portfolio volatility and the ability to earn profit in any economic environment. Managed futures have seen increased institutional use in recent years.
Profit Potential
Managed futures include the risk reduction benefit through portfolio diversification by means of negative correlation between asset groups. As an asset class, managed futures programs are largely inversely correlated with stocks and bonds. In other words, if stocks and bonds under perform due to rising inflation concerns, certain managed futures programs might outperform in these same market conditions.
Hence combining managed futures with these other asset groups may optimize your allocation of investment capital. Managed futures class has produced comparable returns in the decade before 2005. In the past several years, money invested in managed futures has more than doubled and is estimated to continue to grow in the coming years if hedge fund returns flatten and stocks under perform.
Types of Accounts Required to invest in CTA
Investors in CTA have the advantage of opening their own accounts and having the ability to view all the trading that occurs on a daily basis. Typically, a CTA will work with a particular futures clearing merchant and does not receive commissions. In fact it is vital to ensure that the CTA you are considering does not share commissions from his or her trading program.
There are 3 ways in which investors can get into managed futures.
1. Investors can buy shares in a public commodity fund, in much the same way as they would invest in a stock or bond mutual funds. 2. Investors can place funds privately with a commodity pool operator (CPO) who pools investor's money and employs one or more CTA's to manage the pooled funds. 3. Investors can retain one or more CTAs directly to manage their money on an individual basis or hire a manager of managers (MOM) to select CTAs for them.
Conclusion
Given the proper due diligence about investment risk, however, managed futures can provide a viable alternative investment vehicle for small investors looking to diversify their portfolios and thus spread their risk. So if you are searching for potential ways to enhance risk adjusted returns, managed futures can be your next best place to take a serious look.
For more details please visit www.wealthcapfund.com
About the Author
Asia based independent Offshore Investment advisor.Has been involved in the financial services and financial planning business since leaving full time education in 1977.It was his intention to provide an insight in to both the mainstream products offered by the general population of financial advisors out there and also the alternative investment areas that are often overlooked or ignored.
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