These funds are similar to hedge funds in some ways. They take exposure by using futures, options and forwards on traditional commodities, financial instruments and currencies. Managed futures managers offer access to global futures markets through the use of professional money managers called Commodity Trading Advisors (CTAs). They use trading strategies and money management techniques to attempt to achieve profits and control risk. CTAs generally fall into one of two categories: systematic or discretionary. Systematic traders perform quantitative analysis on historical prices and follow either systematic or discretionary approaches to trading. Discretionary managers base investment decisions on the analysis of supply and demand, valuations and cyclical conditions.
CTAs implement strategies using futures contracts. A futures contract is an exchange-traded, liquid, standardized contract which specifies that the parties involved agree to buy or sell a certain underlying instrument at a specified price at a certain date in the future. Futures markets provide exposure across all major asset classes, including those based on interest rates, equity indexes, foreign exchange, energy, agricultural commodities and metals. These markets tend to be very active, liquid and deep.
Managed Futures Strategies
Systematic CTAs utilize quantitative research techniques to arrive at trading algorithms and proprietary trading models to exploit inefficiencies or capture trends in markets. Often, decisions are made based on computing rules arrived at through statistical data analysis. For instance, they may evaluate momentum in prices by assessing for serial correlation to arrive at views on future prices. They may study volatility to determine if sudden price movements exceed caps or thresholds and accordingly scale their trading positions. Their trading models tend to fall into two broad camps; i) trend following; and ii) relative value.
• Trend Following: These strategies are profitable if they are able to identify a trend that subsequently emerges during a period of increased volatility. However, they can experience losses when trends reverse.
• Relative Value: These, as the term suggests, are focused on identifying temporary mispricing between related financial instruments. Some examples of mispricing may be in foreign exchange carry strategies, where one may borrow at cheaper rates in one currency and lend at a higher rate in another. If prices do not move in the anticipated direction, or take a very long time to do so, these strategies result in losses.
• Discretionary CTAs make trading decisions on the basis of their own expert judgment and "trading instinct," not necessarily on the basis of trading signals generated by any program, model or algorithm. Many discretionary CTAs are also loosely referred to as "fundamental." CTAs using the fundamental approach attempt to predict future price levels by studying external fundamental factors, namely supply and demand for a particular group or type of underlying commodity. They may, based on their qualitative judgment, buy undervalued commodities and sell overvalued commodities simultaneously.
Investors may gain exposure to managed futures in a variety of ways. For example, they may invest through pooled investment vehicles. These pooled investment vehicles or funds are typically structured as a limited partnership (L.P.) or a limited liability corporation (L.L.C.). Investors may also gain exposure to managed futures through managed accounts directed by CTAs, which have discretion to trade on the investors' behalf for a fee. Another way is through a mutual fund type structure. In addition to this, there are a variety of active and passive managed futures indices.
Managed futures allow investors to participate in the global futures and forwards markets of commodities, foreign exchange, equity indices, and interest rates sectors. They offer access to global markets, bring professional management, provide relatively better liquidity than other alternative investments as well as a degree of transparency, and the potential for long-term capital appreciation. More importantly they have low correlation with other alternative investment and traditional assets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.