Managed Futures
What Are Managed Futures?
Managed futures alludes to an investment where a portfolio of futures contracts is actively managed by professionals. Managed futures are viewed as an alternative investment and are frequently utilized by funds and institutional investors to give both portfolio and market diversification.
Managed futures give this portfolio diversification by offering exposure to asset classes to assist with relieving portfolio risk in a manner that is preposterous in direct equity investments like stocks and bonds. The performance of managed futures will in general be pitifully or contrarily related with traditional stock and bond markets, making them ideal investments to round out a portfolio developed by modern portfolio theory.
Figuring out Managed Futures
Managed futures have progressively been positioned as an alternative to traditional hedge funds. Funds and other institutional investors frequently use hedge fund investments as an approach to broadening their traditional investment portfolios of large market cap stocks and exceptionally rated bonds. One reason hedge funds were an ideal diversification play is that they are active in the futures market. Managed futures bring developed here to the table for a cleaner diversification play for these institutional investors.
The Rise of Managed Futures
Managed futures advanced out of the Commodity Futures Trading Commission Act, which assisted with characterizing the job of commodity trading advisors (CTA) and commodity pool operators (CPO). These professional money managers varied from stock market fund managers since they worked consistently with derivatives in a manner most money managers didn't.
The Commodity Futures and Trading Commission (CFTC) and the National Futures Association (NFA) control CTAs and CPOs, leading audits and guaranteeing that they meet quarterly reporting requirements. The heavy regulation of the industry is another explanation these investment products have acquired favor with institutional investors over hedge funds.
How Managed Futures Trade
Managed futures can have different loads in stocks and derivative investments. A diversified managed futures account will generally have exposure to a number of markets like commodities, energy, agriculture, and currency. Most managed futures accounts will have a stated trading program that portrays its market approach. Two common approaches are the market-neutral strategy and the trend-following strategy.
Market-Neutral Strategy
Market-neutral strategies hope to profit from spreads and arbitrage made by mispricing. Investors who utilize this strategy much of the time hope to relieve market risk by taking matching long and short positions in a specific industry trying to accomplish profit from both expanding and decreasing prices.
Trend-Following Strategy
Trend-following strategies hope to profit by going long or short as per fundamentals and additionally technical market signals. At the point when an asset's price is trending lower, trend traders might choose to go into a short position on that asset. On the other hand, when an asset is trending vertically, trend traders might go into a long position. The goal is to capture gains by examining different indicators, deciding an asset's direction, and afterward executing a fitting trade.
Investors investigating managed futures can request disclosure records that will frame the trading strategy, the annualized rate of return, and other performance measures.
Features
- Large funds and institutional investors as often as possible utilize managed futures as an alternative to traditional hedge funds to accomplish both portfolio and market diversification.
- Two common approaches for trading managed futures are the market-neutral strategy and the trend-following strategy.
- Managed futures are alternative investments comprising of a portfolio of futures contracts that are actively managed by professionals.
- Market-neutral strategies hope to profit from spreads and arbitrage made by mispricing, while trend-following strategies hope to profit by going long or short as per fundamentals as well as technical market signals.
