Most investors are told that all they need for proper diversification in their investment portfolios is a proper mix of stocks and bonds. Unfortunately, in times where market conditions are volatile, neither asset class will provide you with much protection. For instance, in the typical bear market for stocks, about three out of four stocks will decline in value at the same rate as the overall stock market. Even Apple declined by over 50% during the most recent bear market that ended in March 2009.
During the debacle of 2008, when the stock market was down over 35%, managed futures as an asset class thrived. Many commodity trading advisors registered gains of 20% or more, with some generating profits of over 50%.
If you are unfamiliar with managed futures, they are essentially a subset of hedge fund strategies that trade liquid exchange traded futures and options products as well as currencies in the interbank foreign exchange markets. The investment managers in this asset class are commonly referred to as commodity trading advisors (CTAs). As of the 4th quarter of 2012, total assets under management by CTAs were just under $330 billion. This figure does not include accounts directed by futures brokers.
Trading advisors have the opportunity to participate in over 150 global futures markets. As such, the opportunity for diversification is substantial. These markets include stock index futures, financial futures such as contracts on U.S. Treasury securities, currency futures, metals, energy and agricultural markets.
The performance of managed futures is often completely uncorrelated to financial markets such as U.S. stocks. As mentioned, quite often when stock markets are weak, managed futures thrive. As such, investment portfolios that employ managed futures have the potential to lower overall portfolio risk, improve overall portfolio returns, and profit in a variety of economic environments.
For more information on how you can diversify your portfolio with managed futures or a broker directed futures account, simply fill out the form to the right, and we will send you a free report.