Managed Futures

Managed Futures
A subclass of alternative investment strategies used by large funds

and institutional investors to achieve both portfolio and market
diversification
What are Managed Futures?

Managed futures is a subclass of alternative investment strategies used
by large funds and institutional investors to achieve both portfolio and
market diversification. With the ability to take both long and short
positions, managed futures are diversified, highly-flexible, liquid,
transparent, ideal risk management tools with the potential to profit
from rising and falling markets.
The substantial growth of the managed futures industry over the past
few decades can be attributed to greater investor awareness and
continuous improvement in information technology. As of the first
quarter of 2020, the managed futures (CTA) industry was valued at $278
billion, according to BarclayHedge, a leading research-based provider of
information services to alternative investments.
Summary
Managed futures is an alternative investment vehicle

frequently used by large funds and institutional investors
to achieve both portfolio and market diversification.
They are operated by Commodity Pool Operators (CPOs)
and Commodity Trading Advisors (CTAs).
Managed futures exhibit weak correlation to traditional

asset classes, such as stocks and bonds. When used in
conjunction with stocks and bonds, they have the
potential to lower the overall portfolio risk and increase
returns.
Managed Futures vs. Hedge Funds
Managed futures are different from hedge funds in the sense that

while hedge funds can trade in a wide variety of markets, including fixed
income derivatives, over-the-counter, and individual equity. On the other
hand, managed futures can generally only trade in exchange cleared
futures, options on futures, and forward markets.
CTAs and CPOs
Managed futures funds are operated by Commodity Pool Operators

(CPOs) and Commodity Trading Advisors (CTAs). CTAs are individuals or
organizations responsible for the actual trading of managed accounts.
They provide individualized advice regarding the buying and selling of
commodity futures, futures options, and/or forward contracts on broad
asset classes.
The two major types of CTAs are technical traders and fundamental
traders. Technical traders employ systematic quantitative investment
strategies and use computer programs to follow pricing trends, whereas
fundamental traders understand demand and supply factors to forecast
prices. There are approximately 1,800 CTAs registered with the National
Futures Association, each with its own unique method of managing
assets.
CPOs are the organizations managing commodity pools. They are mostly
in the form of limited partnerships, which hire CTAs to direct the day-to-
day trading of the fund or portion of it. They combine the performance
of a variety of external CTAs or DFMs and are thus called “Manager of
Managers.” There are around 1,100 CPOs registered with the NFA.
Approaches for Trading Managed Futures
1. Market-neutral strategy
A market-neutral strategy is frequently used by investors or investment

managers to reduce some form of market risk or volatility by taking
matching long and short positions in a particular industry. It is a form of
hedging that aims to generate returns from both increasing and
decreasing prices independent of the market environment.
The ultimate goal is to maintain zero beta exposure to the overall market
and thus, the success of the strategy depends purely on the portfolio
manager’s ability to select individual stocks.
2. Trend-following strategy
Unlike the market-neutral strategy, trend trading involves using various

indicators/technical signals to determine the direction of market
momentum. Trend traders tend to enter into a short position when the
price of the asset goes down and may take a long position when the
price goes up.
Benefits of Trading Managed Futures

1. Risk reduction
Managed futures, when used in conjunction with traditional asset

classes, have the potential to lower the overall portfolio risk and increase
returns as they can be traded across a wide range of global markets and
have a low correlation to traditional asset classes such as stocks and
bonds. Also, they have historically performed well and have provided
excellent downside protection in a traditional portfolio during adverse
market conditions.
2. Non-correlation
Managed futures exhibit weak correlation to traditional asset classes

such as stocks and bonds. The low correlation is a result of managed
futures managers’ ability to go long or short across equity index, fixed
income, commodity, and foreign exchange markets without taking on
any systematic exposure to beta. During times of inflationary pressure,
investing in managed futures can provide a counterbalance to the losses
that may occur in the equity and bond market.
3. Diversification opportunities
The rise in actively traded futures contracts and the establishment of

global commodity exchanges have made managed futures a natural
choice for investment portfolio diversification. Managed futures can be
traded in over 150 financial and commodity markets worldwide,
including agricultural products, metals, energy products, equities,
currencies, stock indexes, etc. CTAs, thus, have the opportunity to profit
from a wide variety of non-correlated markets.
4. Limits drawdowns
Drawdowns – peak-to-valley decline in equity or of a trading account or

during a specific period of investment – are inevitable and cannot be
completely avoided. However, because CTAs can go long or short – and
typically adhere to strict stop-loss limits by placing an offsetting order to
limit the losses when the price of the security reaches a specified level –
managed futures funds have the potential to limit drawdowns more
effectively than many other investments.

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A subclass of alternative investment strategies used by large funds

What are Managed Futures?

Managed futures is an alternative investment vehicle

Managed futures exhibit weak correlation to traditional

Managed Futures vs. Hedge Funds

Managed futures are different from hedge funds in the sense that

CTAs and CPOs

Managed futures funds are operated by Commodity Pool Operators

A market-neutral strategy is frequently used by investors or investment

Unlike the market-neutral strategy, trend trading involves using various

Benefits of Trading Managed Futures

Managed futures, when used in conjunction with traditional asset

Managed futures exhibit weak correlation to traditional asset classes

The rise in actively traded futures contracts and the establishment of

Drawdowns – peak-to-valley decline in equity or of a trading account or

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