In a time of historically low bond returns and high realized and potential equity market volatility, two strategies that investors are turning to are commodity trading advisors (CTAs) and global macro hedge funds. In adopting these strategies, it is important for investors to distinguish the similarities and differences between these strategies. CTAs in a hedge fund portfolio can be both a complement to and a substitute for a global macro allocation.
Overview of Managed Futures
Managed futures strategies are the general category of investment strategies into which CTAs fall. These managers implement a wide variety of trading strategies, but the common element of each is that they apply these systems primarily to futures contracts, over the-counter spot and forward contracts (in the case of currencies) and less often, options on futures contracts.
A key feature of these contracts is that they are very liquid. The futures contracts are traded on global futures exchanges where large numbers of buyers and sellers transact every day. The liquidity provides easy entry and exit of positions as well as lower transaction costs because of narrower bid-ask spreads. Lowertransaction costs can improve the performance of the strategy.
Evolution of the Futures Markets
The futures markets were originally a way for producers and consumers of commodities to hedge price risk in an economy weighted more heavily toward agriculture than it is today. As the United States and global economies have shifted away from an agricultural focus, so has the composition of the futures markets. As late as 30 years ago,the futures markets were heavily weighted towards agricultural products. By 1980, trading in financial products besides currencies was limited primarily to US Treasury Bill and Bond futures.
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