FAQ: Managed Futures Basics
Managed futures are a managed approach to futures market participation whereby professional money managers called Commodity Trading Advisors (CTAs) trade futures and options on a discretionary basis pursuant to a power-of-attorney or limited trading authorization. Managed futures are a type of alternative investment established to trade in global futures and options markets. The potential for success is not dictated on market direction the way a traditional stock and bond portfolio may require. Returns are highly dependent on the talent and skill of each individual CTA.
Managed futures should be considered a long-term investment and one that could be added to a traditional portfolio for greater diversification. Managed futures allow investors the potential to gain exposure to markets and strategies uncorrelated with traditional asset types. A managed futures account can also provide insight as to how a professionally managed account is traded. Institutional investors are also increasingly allocating capital to managed futures. These investors may include pension funds, endowments, family offices, etc. However, managed futures may not be right for everyone; it is important for an investor to understand all the risks involved before investing in managed futures.
Commodity Trading Advisors (CTAs) are federally licensed and registered professional money managers who manage investors’ assets in the futures option markets. CTAs are responsible for determining what trades to make and when to make them. CTAs are required by the U.S. government to submit a Disclosure Document that outlines who they are, their trading program description(s), the fees and expenses charged to accounts, and their performance track record. They are regulated by the Commodity Futures Trading Commission (CFTC) and are members of the National Futures Association (NFA).
Initially, managed futures appealed to individual investors seeking the profit opportunities of futures trading but without the responsibility and demands of daily account management. In the last decade, growing numbers of corporate and institutional investors have been allocating a portion of their total portfolio assets to specifically designed and professionally managed futures trading programs.
We believe that investors should invest in managed futures only if they understand and can deal with the risks and rewards involved in trading futures, who can invest for at least three years, and who treat managed futures as a “core” investment instead of a short-term trading opportunity.
As traditional markets have become more volatile and subject to unexpected events, investors have sought to more effectively manage their portfolio risk through further diversification. As noted in the CME Group’s Managed Futures brochure, “One of the tenets of modern portfolio theory, as developed by Nobel prize-winning economist Professor Harry M. Markowitz, is that more efficient investment portfolios can be created by diversifying among asset classes with low to negative correlations.” Adding a managed futures fund to a portfolio of traditional stocks and bonds has the potential to reduce risk and improve performance. Please note past performance is not necessarily indicative of future results.
The enormous broadening of futures markets to encompass stock indexes, debt instruments, currencies, options, and conventional commodities has created whole new categories of profit opportunities along with an expanded global scope.
Generally speaking, most CTAs charge a 2% annual management fee and a 20% annual, performance-based, incentive fee. All fees charged by a CTA are described in the CTA’s Disclosure Document and should be scrutinized carefully before opening an account.
CTAs report performance net of all commissions and fees. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. The risk of loss trading futures and or options on futures can be substantial. Only use genuine risk funds.
Yes, but they must be invested through a “self-directed” IRA. You must first open a self-directed IRA that accepts futures accounts through a third-party trust custodian. A self-directed IRA allows the investor to roll assets forward and continue to let them grow tax deferred.