Managed Futures Account
Encyclopedia
A managed futures account (MFA) or managed futures fund is a type of alternative investment
. Managed futures accounts include, but are not limited to, commodity pool
s and commodity funds. Unlike mutual fund
s, managed futures accounts can take both long and short positions in futures contract
s and options
on futures contracts in the global commodity, interest rate, equity, and currency markets.
Managed futures accounts are operated by licensed commodity trading advisor
s (CTAs), who are regulated in the United States by the Commodity Futures Trading Commission
and the National Futures Association
. Some are compensated on a performance fee basis, usually 15% to 30% of profits. Other CTAs are compensated by charging a per trade cost whenever the account or fund trades. Most CTAs also charge a management fee per year, usually between 1% to 2% of the account size.
MFAs may be traded using any number of strategies, the most common of which is trend following
. Trend following involves buying markets that are making new highs and shorting markets that are making new lows. Variations in trend following managers include duration of trend captured (short term, medium term, long term) as well as definition of trend (i.e. what is considered a new high or new low) and the money management/risk management techniques. There are other strategies managed futures managers use, including discretionary strategies, fundamental strategies, option writing, pattern recognition, arbitrage strategies, etc. However, trend following and variations of trend following are the predominant strategy.
total return index) the return was 7.04%.
Managed futures have historically displayed very low correlation
s to traditional investments, such as stocks and bonds. Following modern portfolio theory
, this lack of correlation builds the robustness of the portfolio, reducing portfolio volatility and risk, without significant negative impacts on return. This lack of correlation stems from the fact that markets tend to "trend" the best during more volatile periods, and periods in which markets decline tend to be the most volatile. In fact the CISDM CTA Equal Weighted Index has been up 26 out of the 32 times the S&P 500 has been down 5% or greater since 1980.
Alternative investment
An alternative investment is an investment product other than the traditional investments of stocks, bonds, cash, or property. The term is a relatively loose one and includes tangible assets such as art, wine, antiques, coins, or stamps and some financial assets such as commodities, private equity,...
. Managed futures accounts include, but are not limited to, commodity pool
Commodity pool
A commodity pool is an investment structure where many individual investors combine their moneys and trade in futures contracts as a single entity in order to gain leverage...
s and commodity funds. Unlike mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...
s, managed futures accounts can take both long and short positions in futures contract
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
s and options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
on futures contracts in the global commodity, interest rate, equity, and currency markets.
Managed futures accounts are operated by licensed commodity trading advisor
Commodity trading advisor
A commodity trading advisor is an asset manager who follows a set of systematic investment strategies in futures contracts and options on futures contracts. The advisors originally operated predominantly in commodities markets, but today they invest in any liquid futures market. They are...
s (CTAs), who are regulated in the United States by the Commodity Futures Trading Commission
Commodity Futures Trading Commission
The U.S. Commodity Futures Trading Commission is an independent agency of the United States government that regulates futures and option markets....
and the National Futures Association
National Futures Association
The National Futures Association is an independent self-regulatory organization and watchdog of the commodities and futures industry in the United States. The NFA oversees and protects investors from fraudulent commodities and futures activities. The NFA also provides mediation and arbitration...
. Some are compensated on a performance fee basis, usually 15% to 30% of profits. Other CTAs are compensated by charging a per trade cost whenever the account or fund trades. Most CTAs also charge a management fee per year, usually between 1% to 2% of the account size.
MFAs may be traded using any number of strategies, the most common of which is trend following
Trend following
Trend following is an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. The strategy aims to work on the market trend mechanism and take benefit from both sides of the market, enjoying the profits from the ups and downs of the stock or...
. Trend following involves buying markets that are making new highs and shorting markets that are making new lows. Variations in trend following managers include duration of trend captured (short term, medium term, long term) as well as definition of trend (i.e. what is considered a new high or new low) and the money management/risk management techniques. There are other strategies managed futures managers use, including discretionary strategies, fundamental strategies, option writing, pattern recognition, arbitrage strategies, etc. However, trend following and variations of trend following are the predominant strategy.
Performance
For the years 1980 to 2010, managed futures, as measured by the CASAM CISDM CTA Equal Weighted Index, had a compound average annual return of 14.52%, while for U.S. stocks (based on the S&P 500S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...
total return index) the return was 7.04%.
Managed futures have historically displayed very low correlation
Correlation
In statistics, dependence refers to any statistical relationship between two random variables or two sets of data. Correlation refers to any of a broad class of statistical relationships involving dependence....
s to traditional investments, such as stocks and bonds. Following modern portfolio theory
Modern portfolio theory
Modern portfolio theory is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets...
, this lack of correlation builds the robustness of the portfolio, reducing portfolio volatility and risk, without significant negative impacts on return. This lack of correlation stems from the fact that markets tend to "trend" the best during more volatile periods, and periods in which markets decline tend to be the most volatile. In fact the CISDM CTA Equal Weighted Index has been up 26 out of the 32 times the S&P 500 has been down 5% or greater since 1980.