Managed Futures in the Portfolio; Why and Why Now?

  • Written by David
  • June 8, 2011 at 2:56 pm
  • 1
  • For some time I have been monitoring/researching additional ways to increase client return, while not subjecting their portfolios to undo downside market risk; and the world seems to just get more risky hour by hour. Non-the-less, years ago I was attracted to a certain financial Strategist firm for their prescient ability to include inverse assets (such as the professionally managed S&P 500 Put options) to complement my clients’ long-only equity allocations allowing for significantly less downside risk  than that of the overall markets themselves. Last year one of my Strategist ‘partner firms’ acquired an organization which is a manager of mangers in the ‘managed futures’ asset class space. I have looked at managed futures for years as yet another tool to diversify away risk during major market declines and also earn ‘excess’ return during time periods when traditional asset classes have had sub-optimal returns; such as the now decade long flat market returns know as the ‘lost decade’ for the S&P 500 index. However, for the individual investor many complications in the past such as account minimums, illiquid positions, obtuse custodial relationships etc. have kept me away. With technology, much of that is behind us now and thus my introduction of managed futures.

    Why Managed Futures? Two reasons.

    1. Generate return when traditional asset classes under perform; such as stocks and bonds.

    Generating return when traditional asset classes cannot. Note the ten year chart (2000-2010) and  how managed futures have gone up during a time when the stock market (S&P 500) trended sideways for ten years.

    source: Altegris Investments

    2. Reduce risk of traditional asset classes; offset stock market and bond market declines with Managed Futures.

    Offsetting the risk of traditional asset classes during major market downturns.. Note the ten year chart (2000-2010) and  how managed futures have gone up during a time when the stock market (S&P 500) declined significantly 2000-2002 and 2007-2009. source: Altegris Investments

    Why Managed Futures Now?

    Western world economies are still in a balance sheet recession. That is a nice way to say there is still too much debt in the world and as debt gets dealt with, by any and all means to include default, restructuring, or inflating it away, there could be, well, probably will be, significant shocks to traditional asset classes such as stock and bonds. Managed futures will act as a cushion to those shocks. Note how Managed Futures has acted as a cushion during historical ‘black swan’ events. (major economic/geopolitical events that negatively effects markets.)

    source: CME

    Additionally, I as an Advisor, can no longer look to the bond market (as I have for the past twenty five years) as a risk mitigation asset class. As we know, interest rates have been falling since the early 1980′s. It is not if you could make money in bonds, but by how much. Going forward, we will be presented with rising interest rates. Bonds will suffer. We all understand the inverse relationship between bond prices and interest rates, yes? Note the graph below.


    What are Managed Futures?

    They represent an asset class managed by professional investment managers who use trading systems to invest in futures and options contracts. These managers I hire typically invest in the four areas below:

    1. Interest Rates
    2. Equity Indices
    3. Currencies
    4. Commodities

    The managers are typically ‘trend following’ so their ability to profit can be long (buy) positions or short (sell) positions. Markets are global in nature and cover over 150 global markets to include asset classes in stocks, bonds, commodities and currencies. Once a manager’s proprietary trading system dictates the trend, a corresponding transaction is put into place.

    What’s ‘under the hood?’

    For illustrative purposes only, note the graph below which depicts key asset classes and possible investments within each asset class.

    source: CME

    How do Managed Futures Managers Make Money?

    Most of the managers are trend followers. This is to say, once a trend has been identified by a given manager, their team places a transaction to benefit from said identified trend. Mind you, the trend can up upward in price appreciation, or downward in price depreciation. Once a trend has shown to either reversed course, or simply, run it’s course, the transaction is closed out, otherwise completed. Note the graphic below which illuminates trend following for both an upward and downward trend. Each manager will have hundreds of ‘trades’ in place at any one time as well. Then combine that with multiple managers, one can see how risk is managed; again via diversification. When trends are directionless, or to say, no strong trend is in place, trend following will typically not be able to generate a profitable return as we will discuss below.

    source: Altegris Investments






    1. Managed Futures offers my clients access to returns during extended time periods when traditional asset classes (i.e. stocks) have not generated positive returns. 2.) Interest rates are at multi-generational historic lows; going forward, using bonds to protect a portfolio from risk, or to generate return from falling interest rates, is ‘not in the cards’. In a rising interest rate environment, bonds will present much risk. (Example, a two percent rise in interest rates will cause a bond with a ten year maturity to lose 20% of it’s market value.) Managed Futures now and for the reasons that have been illuminated above. Asset allocation percentages vary by investor goals and objectives.


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  1. Pingback : From the Desk of David Gratke » Blog Archive » Brace Yourself

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