Managed Futures
Managed futures refers to an investment where a portfolio of futures contracts is actively managed by professionals. Managed futures are considered an alternative investment and are often used by funds and institutional investors to provide both portfolio and market diversification.Managed futures provide this portfolio diversification by offering exposure to asset classes to help mitigate portfolio risk in a way that is not possible in direct capital investments like stocks and bonds. The performance of managed futures tends to be weakly or inversely correlated with traditional stock and bond markets, making them ideal investments to round out a portfolio constructed according to modern portfolio theory.
Managed Futures
Definition
Managed futures refer to investments in a portfolio of futures contracts actively managed by professionals. They are considered an alternative investment and are often used by funds and institutional investors to provide diversification to portfolios and markets. By offering exposure to different asset classes, managed futures help mitigate portfolio risk, which is not possible with direct capital investments like stocks and bonds.
Origin
The concept of managed futures originated in the 1970s when some professional investors began using the futures market for diversified investments. In 1972, the U.S. Commodity Futures Trading Commission (CFTC) was established, further regulating and promoting the development of the futures market. Over time, managed futures have become a mature investment tool widely used in hedge funds and institutional investors' portfolios.
Categories and Characteristics
Managed futures can be categorized into the following types:
- Commodity Futures: Includes futures contracts for agricultural products, metals, and energy.
- Financial Futures: Includes currency, interest rate, and stock index futures.
- Mixed Futures: Contains both commodity and financial futures.
The main characteristics of managed futures include:
- Diversification: Reduces the risk of single market volatility by investing in different asset classes.
- Professional Management: Managed by experienced professionals using advanced trading strategies and risk management tools.
- Low Correlation: Exhibits low or negative correlation with traditional stock and bond markets, helping to balance the overall risk of the investment portfolio.
Specific Cases
Case One: A hedge fund invests in energy and agricultural futures through managed futures. In a year when the stock market plummets, the fund's managed futures segment performs well due to rising energy and agricultural prices, offsetting the losses in the stock market.
Case Two: An institutional investor adds a portion of managed futures to its portfolio, primarily investing in currency and interest rate futures. Amid increasing global economic uncertainty, the currency and interest rate futures perform steadily, providing an additional safety cushion for the portfolio.
Common Questions
1. What are the risks of managed futures?
Although managed futures can provide diversification and risk management, they still face market volatility, liquidity risk, and management risk.
2. Who are managed futures suitable for?
Managed futures are suitable for institutional investors and high-net-worth individuals seeking diversified portfolios and willing to take on some risk.
