The Benefits of Managed Futures in the Post-Lehman, Post-Madoff Era
E. Bruce Mumford, Partner
2100 Xenon Group
An investor considering an allocation to managed futures recently asked me if the Lehman Brothers' bankruptcy and the collapse of Bernard Madoff's fraudulent investment firm had been good or bad for the futures industry. There is no single or easy answer to that question.
In 2008, these events shocked the global markets in different ways. Lehman and Madoff were 'bad' in terms of the damage they inflicted on people's portfolios and how they eroded investor confidence. The fallout from these losses will likely be felt for years to come.
The important lesson learned – namely the need for a well-diversified, transparent, reasonably liquid portfolio – is the 'good' thing that sprang from these events and the market turmoil of recent years.
In different ways, Lehman and Madoff illustrated the need for the very best of what the managed futures industry has to offer, specifically transparency, liquidity and uncorrelated returns. Throughout the recent financial crisis, the global futures markets continued to perform well and most investors with exposure to futures directly realised the benefits of diversification into these markets.
Two years later, Lehman and Madoff are history, but other events continue to roil the markets and further erode public trust. As many investors search for ways to recoup the losses sustained in 2007 and 2008, there is still much uncertainty with respect to the direction of the economy and the markets. The legislative environment remains murky. There is talk of position limits and tax law changes. Implementation of the Dodd-Frank financial reform legislation will have far-reaching and as yet unknown consequences. The resolution of these issues could have dramatic effects on the markets, including offering new opportunities.