Most investors are completely unaware of the opportunities available in the futures markets, or are simply too scared to consider an investment in these markets. Over the years, futures traders have been viewed as the gunslingers in the financial universe, as these markets have been viewed as the most risky. However, investment managers who make their livings by trading in the futures markets are actually more adept at controlling risk than their counterparts in the stock market. This is due to the extreme amount of leverage available in the futures markets.
The typical margin required to invest in a single futures contract is usually only 5% to 10% of the value of the entire contract. As a result, these investment managers must successfully employ strict risk management in their trading in order to avoid the potential for huge losses inherent in these markets. The most successful of these investors actually trade with very limited risk. It is their strategies that boost returns to investors.
The CME Group, which handles most of the clearing of trades in U.S. futures markets, has produced a report about managed futures. You can read the full report here
As discussed in the CME Group report, the 5 main benefits to investing in Managed Futures are
- Potential to Lower Overall Portfolio Risk
- Opportunity to enhance overall portfolio returns
- Broad diversification opportunities
- Opportunity to profit in a variety of economic environments
- Limited losses due to a combination of flexibility and discipline
The primary benefit to investing in managed futures is the potential to decrease portfolio volatility. It is possible to reduce the overall risk in a portfolio by including managed futures because of the ability to trade across a wide range of global markets that have limited correlation to traditional asset classes. Also, managed futures have historically performed well during adverse economic conditions, or environments where stocks and bonds perform poorly. As a result, managed futures can provide significant downside protection.
Managed futures can also enhance overall returns. A portfolio that includes managed futures, historically, would have provided higher returns and lower risk than one without managed futures at all. In fact, a recent study indicates that from 1994 through early 2012, the optimal portfolio mix was one that was 40% invested in stocks, 40% invested in managed futures, and 20% invested in bonds. It should be noted that there is no guarantee that this will continue into the foreseeable future.
Managed futures offer substantial diversification opportunities. Commodity trading advisors (CTAs) who manage portfolios for investors can trade in over 100 liquid global markets that include stock indexes, fixed income, currencies, metals, energy markets and commodities.
Because of their ability to sell short in declining markets, CTAs can generate profits during bull and bear markets. This allows for the opportunity to profit in almost any economic environment. In fact, in 2008, during the global meltdown in equity markets around the world, the Barclay CTA Index actually rose by over 14%.
Drawdowns, which are the reduction in value that a portfolio will experience during bear markets or market corrections, are inevitable. However, since CTAs are able to go long or sell short in any market, and they typically adhere to strict risk management, managed futures funds have historically limited their drawdowns more effectively than many other investments.
If you are interested in discussing the opportunities available, please contact Scott Cole at firstname.lastname@example.org or call me at 717-856-1453.