MANAGED FUTURES EDUCATION
Managed Futures refer to a type of alternative investment which relies on professional investment managers known as a Commodity Trading Advisor (CTA), who specializes in commodity futures and options trading. Managed Futures investments are also referred to as CTA programs or Managed Futures Accounts, as the commodity trader (CTA) actually manages each client's individual account, placing trades in the client's accounts directly on their behalf, like their own personal futures trader.
The strength of many Managed Futures investments lies in their low correlation to the stock and bond markets, meaning you can make money whether stocks go up or down (or lose). This ability to post "absolute returns," paired with low correlation makes investing in a managed futures a perfect candidate for portfolio diversification.
Commodity Trading Advisors can make absolute returns by being able to play both sides of any market. They can buy futures positions in anticipation of a rising market or sell futures positions if they anticipate a falling market. Trading advisors can even use strategies employing options on futures contracts that allow for profit potential in flat or neutral markets.
This ability of managed futures to provide absolute returns and provide true diversification to a portfolio come from their exposure to commodity markets, which rely on supply and demand factors instead of factors such as a strong economy, credit conditions, or corporate profits as their price drivers.
And unlike long only commodity indices and commodity ETFs which rely on the price of commodities rising, managed futures programs actively trade both sides of commodity price movements, allowing them to perform whether commodity markets go up or down.
Bear Market Protection
Futures based investments are often viewed as a way to generate oversized returns due to the leverage built into futures contracts and potential for large moves, but it is their low correlation with traditional markets which causes managed futures investments to be volatility reducers and portfolio diversifies during the bad times.
Consider how managed futures as an asset class (using the Credit/Suisse Managed Futures Index) has reacted to different market 'stress periods' as compared with the stock market (as measured by the S&P 500 index and MSCI World Index) over the past few decades in the chart below.* History shows us that managed futures are the place to be during bear markets and crisis situations.
One caveat, if you are looking for the diversification benefits and outperformance of the stock market during stress periods represented by managed futures indices' historical returns - make sure your managed futures program is actually giving you managed futures exposure. Some managed futures programs which sell options or trade stock index futures exclusively may not give you the diversification you think you are getting with managed futures, or worse - doubling up on the risk in your traditional portfolio.
Individually Managed Accounts
In the wake of the historic Bernie Madoff ponzi scheme wiping out investors in his fund and other funds which invested in his fund — high net worth investors the world over wondered how they can avoid such scams short of hiring private investigators, full time due diligence staff, or simply hiding money under their mattress and stopping any investment activity.
Managed Futures and their individually managed account structure are an easy solution to avoiding such fraud. Individually managed accounts are really no more complicated than what their name implies. They are accounts in the client's name which are managed by someone else. A manager who accepts individually managed accounts will actually place trades directly into a client's account, review the specific balances and positions in that account daily, increase and decrease position sizing for that specific account, and so on.
Contrast this with a manager who operates through a fund structure. In that case, the trades are placed in single fund account, versus the individual accounts of hundreds of investors. And the manager reviews the positions and balances for the overall fund only, not worrying about how much money a specific investor in the fund has.
When you invest in a fund — you are handing over your money to that fund, and putting your money in the name of the fund. Your money becomes part of the assets of the fund, with you owning a part of those overall assets. With an individually managed account, you don't hand over your money to a fund, you keep your money in your name, and your money does not become part of the assets of the manager you invest in.
With everything in the name of the manager, the risk of fraud exists due to the manager basically having check writing ability for the assets of the fund. He or she could decide to buy a new car or cash the whole fund out and head to the Caribbean if so inclined (or do a Ponzi scheme as Madoff). In contrast, the risk of that type of fraud is eliminated in an individually managed structure, where only the client has check writing privileges out of their account.
Management & Incentive Fees
Most Managed Futures programs have terms similar to a hedge fund, with a 0% to 3% annual management fee, and 15% to 30% incentive fee, which means they take around 20% of the profits they make you. While some investors scoff at having to pay a portion of profits to the manager, we like the alignment of interests that presents - as the commodity trading advisor doesn't make the bulk of their money unless the client makes money.
To see the performance of various managed futures programs net of these fees, please visit our managed futures performance page.
Investors interested in a managed futures program which is not exempt from providing such, must review and sign off on the commodity trading advisor's Disclosure Document. The disclosure document (or D-Doc) includes an agreement whereby the client authorizes the CTA to direct trading in the client's commodity account, and outlines certain risk factors general to managed futures and specific to the advisors program. The disclosure document also discloses any and all management and incentive fees as described above to be charged to your account by the CTA.
Notional Funding, Transparency, Liquidity
A characteristic unique to managed futures accounts is the ability to use notional funding to trade. Because a futures trade requires only posting a performance bond with the exchange equal to roughly the amount of money that position could lose in a day, there is often a large difference between a CTA's required minimum investment amount and the amount which technically needs to be in the account to cover the performance bonds, or margin. This opens up the possibility of being able to deposit $50,000 to trade as $100,000, for example. One caveat, you will still be charged fees on the notional balance ($100K in our example), and those will be a much higher percentage of your actual balance ($50K in our example)
Transparency & Liquidity
Two big advantages a managed futures investment has over a commodity pool or alternative investments in vehicles such as hedge funds or real estate is full transparency and nearly instant liquidity. Investors can see all of their positions marked to the market at all times, and should an investor need cash for any reason, wires can be processed the same day if received by 11AM.
Managed futures accounts are taxed based on their value at the end of the year. This is good news for investors, as futures gains or losses are treated as 60% long term capital gains and 40% short term capital gains, NO MATTER the holding period. For example, an investor who holds a futures position for just a few minutes, or hours, can book 60% of the profits on that trade as long term gains - even though the trade was anything but long term. What a deal!
There is also no trade by trade accounting in futures, no wash sale rules, and losses can be carried back three years on futures based investments.
Don't Pay up front fees
We hope you decide to invest in a managed futures program through Attain, but even if you don't, we would like to save you some money by telling you to NEVER pay up front fees for a Managed Futures Account. This practice is becoming more prevalent amongst futures brokers, and it is absolutely bad for the investor for three reasons:
- The investor usually invests based upon a CTA track record, but that track record does not include the up front charge.
- The investor stands to make considerably less with the CTA program over the course of the investment.
- It's not a requirement for participation in the CTA program (you could invest in the same program at Attain and not have to pay it !!)
To learn more about our Managed Futures Broker services, email or call us at 800.311.1145 to speak with a commodity trading advisor specialist. We're here to help and happy to answer any questions you may have about managed futures and Attain's commodity trading advisor services.
*Managed Futures = CSFB/Tremont Managed Futures Index. World Stocks = MSCI World Index. These indices are designed to represent the performance of each asset class as a whole, but may not be representative of any specific managed futures or stock market investment and do not include the entire universe of managed futures or stocks, only those chosen by the index.