Managed futures funds have experienced a steady influx of
capital over the last decade, increasing from around USD 5
billion at the end of the 1980's to over USD 50 billion by
the end of 2002.
Money under management in managed futures 1980 - 2002
Source: Barclay Trading Group, Ltd.
Much of this growth can be credited to greater investor awareness
of the valuable benefits managed futures can add to investment
portfolios, including the potential to generate healthy profits
in rising or falling markets. Indeed, over the last 5 years,
managed futures have produced a total return of 48.1%2 against
a drop of -20.6% for MSCI World Stocks.3
To gain an insight into managed futures it is instructive
to take a look into what they are, where they have come from
and what advantages they can offer to an investor.
Also known as Commodity Trading Advisors (CTAs), managed
futures are a pool of futures or forwards contracts managed
by professional money managers. They are similar to a mutual
fund, in that individual or institutional investors have a
share, only the investments in this case are mainly futures
contracts. Unlike fundamental securities such as stocks and
bonds which are held within a mutual fund, a future is a derivative
instrument, one whose value depends on the value of an underlying
Futures contracts originated to help reduce risk for farmers
by ensuring a guaranteed price for their crops. The price
of a commodity was established on the day of contracting and
a small deposit placed by the purchaser to ensure delivery.
The actual delivery occurred on a future date, and the outstanding
payment was settled. This allowed farmers to establish future
prices for commodities such as wheat and helped merchants
establish costs in advance of a purchase.
Organised futures markets began with the opening of the Chicago
Board of Trade (CBOT) in 1848 as American Midwest farmers
trading with east coast merchants needed to bring order and
standardization to the chaotic conditions that existed in
During the 1970's, the exchanges began to develop a number
of financial futures for hedging interest rate and currency
risk. The number of financial instruments for hedging, or
speculating, has grown exponentially since 1980.
Today, managed futures provide direct exposure to international
financial and non-financial asset sectors. Trading advisors
have the ability to trade in over 100 different markets worldwide.
These markets include interest rates, stock indexes, currencies,
precious metals, energies and agricultural products.
Features of managed futures
For a trade to occur there must be a buyer and a seller.
The buyer is said to be long and the seller short. Futures
markets provide unique opportunities to generate profits in
many market environments because it is just as easy to sell
short contracts as it is to buy them. In traditional markets
it is often difficult, or even impossible, to sell assets
not already owned, necessitating a more traditional buy and
hold approach that is dependent on bull markets to return
This also allows traders to easily bring their net position
in a particular futures contract back to zero so that no delivery
of goods is necessary. This is done through an offset trade
where the original transaction is reversed exactly.
Also, the purchase of a futures contract does not involve
payment of the entire value of the transaction. Only a fraction
of the value is deposited, known as a margin payment. Margin
is a good faith deposit that indicates the trader's willingness
and ability to fulfil all financial obligations that may arise
from trading futures. One effect of the marginal deposit requirement
is that a proportion of remaining funds can be allocated to
Because the margin deposit needed to buy or sell a futures
contract is only a portion of the current market value of
the contract, managed futures have an inherent degree of leverage.
Any change in the price of a security can consequently result
in a much larger percentage gain or loss on the funds deposited
as margin. A proficient use of leverage can result in desired
levels of return for the amount of capital employed.
Types of managed futures
Typically managed futures use a systematic approach to investment,
although some use discretionary trading methods. Discretionary
trading relies on the judgement of the manager and their expertise
within a particular market to make investment decisions.
The more prevalent systematic approach relies on the application
of technical analysis to evaluate the movements of markets,
such as changes in price and volume.
The trading is based on the systematic application of quantitative
models that use moving averages, break-outs of price ranges,
or other technical rules to generate buy and sell signals
for a set of markets. This tends to be automated, particularly
with the emergence of electronic trading systems
In general, most managed futures managers tend to view price
trends as a function of supply and demand for a particular
commodity or financial instrument. As the interaction of these
elements form continuous market movements they try to capture
profits. In short, managed futures managers attempt to identify
the beginning of a trend, take a position and exit it as it
Protective stops can be adjusted daily and more positions
might be built up if the trends are stable, or quickly reduced
during adverse or highly volatile periods. Also the amount
of risk on groups of related markets and on the total portfolio
can be controlled. Further risk reduction is achieved by means
of market diversification.
Managed futures investments can benefit from the application
of a range of trading systems or investment strategies, such
as systematic, arbitrage, and spread trading strategies. Investment
approaches can also be differentiated by trading frequency
Managed futures within a portfolio
The developments over the last twenty years have made managed
futures a specialised but increasingly significant asset class
within the investment industry. Importantly, high quality
managed futures funds are capable of achieving attractive
returns with risks comparable to those of a traditional stock
investment. Furthermore, managed futures can enhance the diversification
of a portfolio and therefore play an important role in improving
the risk and reward characteristics of that portfolio.
Potential impact of adding managed futures to a traditional
1 January 1985 to 28 February 2003
Source: Man database, Barclay Trading Group, Ltd, Bloomberg
and Standard & Poor's Micropal. There is no guarantee
of trading performance and past performance is not necessarily
a guide to future results. World stocks: MSCI World Stock
Index (Total Return) World bonds: Salomon World Government
Bond Index (Total Return). Cash: US Treasury Bill Index. Managed
futures: Barclay CTA Index. Traditional Portfolio: 45% World
stocks, 45% World bonds and 10% Cash. Enhanced portfolio A:
90% Traditional portfolio and 10% Managed futures. Enhanced
portfolio B: 80% Traditional portfolio and 20% Managed futures.
Enhanced portfolio C: 70% Traditional portfolio and 30% Managed
Because managed futures provide an opportunity to profit
from both upward and downward directional moves in the underlying
assets and cover a wide range of commodity and now financial
contracts, it is possible to achieve a low level of correlation
with traditional forms of investment. This means that the
performance of managed futures need not be tied directly to
the price movements of the underlying assets being traded.
Optimal diversification can be achieved when there is no,
or only low, correlation between the constituent elements
of a traditional investment portfolio. The more independent
of market performance the returns of a futures fund are, the
more the fund is suited for inclusion in a traditional portfolio.
Exposure across the full range of market sectors helps to
smooth out peaks and troughs in performance due to the tendency
of markets in each sector to display broadly different behavioural
characteristics. For example, the factors affecting world
commodity markets frequently differ from those influencing
traditional asset classes. Like capital markets, global commodity
markets tend to move in cycles - with periods of price strength
usually associated with growth and stability in the world
economy and periods of weakness with recession - but within
these broad cycles there are often seasonal and sharp price
movements prompted by a sudden change in the supply picture
as a result of environmental or political factors. Trading
commodities using futures, it is possible to reap gains from
the sometimes fervent upward and downward price movements
that result from the uncertainty that frequently drives these
Futures funds themselves can be structured with a high level
of diversification. The significant growth in the number and
diversity of futures markets in recent years has facilitated
a broadly diversified approach across geographical regions
and asset classes, avoiding over-concentration in any market
or market sector.
Historically, managed futures have shown low or negative
correlations to stock and bond market returns, and this low
correlation is expected to continue. Some of the factors that
have a negative impact on the stock markets, such as economic
and political uncertainty, can cause moves in the prices of
currencies or energy to create profit opportunities that managed
futures managers exploit.
Access to numerous global investment opportunities means
managed futures can offer an important diversification opportunity,
and their addition to an investment portfolio can help smooth
overall returns. Any investor considering an allocation to
managed futures should approach them first and foremost as
a long term investment. A commitment of capital to managed
futures should be based on the track record, reputation and
length of experience of the manager.
Barclays CTA Index vs World stocks performance chart
1 January 1985 to 28 February 2003
Source: Barclay Trading Group, Ltd and Standard & Poor's
Micropal. There is no guarantee of trading performance and
past performance is not necessarily a guide to future results.
World stocks: MSCI World Stock Index (Total Return)
This promotion is communicated by Man Investments Ltd which
is authorised and regulated by the Financial Services Authority.
Potential investors should note that alternative investments
can involve significant risks and the value of an investment
may go down as well as up. There is no guarantee of trading
performance and past performance is not necessarily a guide
to future results. This material is only to be communicated
to persons outside the UK and should not be relied upon by
any other person.