Portfolio Investment Opportunities in Managed Futures

David M. Darst

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118502945
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Finanzas

New research and investment strategies for asset managers in managed futures

In this handy new e-book, bestselling author David M. Darst provides the latest information on managed futures and their appropriate role within investment portfolios. The first section of the e-book covers select investment advantages and potential risks of managed futures, including historical background on futures, their advantages, risks involved, and key trends and drivers. The second section offers a summary of managed futures investment performance and correlation, including the performance of the major futures indices. The remaining sections provide an overview of the current investment landscape, a glossary of available indices, and important sources of further information. Portfolio Investment Opportunities in Managed Futures gives investors the information they need to make intelligent investment decisions in this important asset class.

• Covers key factors investors need to know about managed futures, including advantages, risks, and investment performance
• Written by David M. Darst, CFA, the bestselling author of The Little Book That Saves Your Assets
• Perfect for individual investors, financial advisors, and CFAs interested in how managed futures can meaningfully improve the risk-reward profile of their portfolios

1

Select Investment Advantages and Potential Risks of Managed Futures

Futures contracts are standardized contracts that allow for the delivery of an underlying commodity or financial instrument at a specified price on a stipulated future date. A futures contract obligates the buyer to purchase the underlying commodity or instrument, and the seller to sell it, unless the contract is sold, transferred, or closed out prior to the established settlement date. Futures contracts involve a form of inherent leverage through the posting of initial, variation, and maintenance margin, which is a performance guarantee that the contract will be honored. Because futures prices are driven by and derived from the behavior of the underlying commodity or financial instrument, futures are considered derivative instruments.

The Commodity Futures Trading Commission (CFTC), created by the United States Congress in 1974, is responsible for regulating futures trading and markets. The mission of the CFTC is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.

Historical Background on Futures and Managed Futures1

Although recorded instances exist of the trading of rice futures in Japan during the seventeenth century, exchange-based futures trading began in the United States during the middle of the nineteenth century. In 1848, 82 Chicago merchants agreed on the need to establish a central trading exchange that would set an immediate and a future price for grain. In response, these merchants founded the Chicago Board of Trade (CBOT) at 101 South Water Street in Chicago, the world's first organized futures exchange. On March 13, 1851, the first contract was traded on this exchange, marking the formal inception of the futures industry.

For more than 100 years, the futures markets expanded in size and breadth, but remained focused solely on grains and agricultural commodities. Futures contracts provided farmers, ranchers, distributors, and others in the commodities markets with an efficient mechanism to help manage and hedge against the price volatility often experienced in agricultural markets.

As time passed, the risk management benefits of the futures markets became apparent to other sectors of the economy, and beginning in the late 1970s and early 1980s, the industry began introducing contracts that created new futures products and markets for metals, energy, interest rates, currencies, and other financial instruments.

During the late 1970s, a number of commodity trading advisers (CTAs) were established, inaugurating the managed futures industry. CTAs are investment managers who use the global futures, options, and related markets as an investment medium to manage their clients' assets.

In the latter two decades of the twentieth century and on into the twenty-first, the managed futures industry has exhibited rapid growth, and as of the end of 2012, it was estimated that futures trading advisers had more than $300 billion under management globally.

Many domestic and international corporations, financial institutions, trading firms, and securities broker-dealers are active participants in the managed futures marketplace. Hedgers rely on the futures markets to obtain protection against rising or falling prices, while speculators and traders seek to profit from their trading and investment strategies in the futures markets.

Distinguishing between Physical Commodities, Futures, and Managed Futures

Instrument or Strategy	Determinants of Investment Success	Principal Means of Implementation
Physical Commodities (Purchased and sold by investors, hedgers, speculators, and traders)	• Commodity selection • Prediction of price movements • Costs and amounts of leverage • Risk control behavior	• Physical commodities • Options, futures, and swaps involving commodities • Collateralized futures (futures contracts plus government securities posted as full or partial margin collateral)
Futures (Purchased and sold by investors, hedgers, speculators, and traders)	• Instrument selection • Prediction of price movements • Costs and amounts of leverage • Risk control behavior	• Commodity futures • Financial futures
Managed Futures (Managed by CTAs; also known as managed funds, managed futures funds, or managed futures advisers, in partnerships subscribed to by investors)	• Manager selection • Manager trading skill • Manager model construction • Manager use of leverage • Risk control systems and behavior	• Financial futures • Commodity futures • Forwards and cash instruments • Options, swaps, and swaptions • Physical commodities
Source: Morgan Stanley Wealth Management Investment Strategy; Morgan Stanley Wealth Management Managed Futures Department.

Select Advantages of Managed Futures

Low Correlations with Many Other Asset Classes

Because of their generally low correlations of returns with many other conventional and alternative asset classes (including hedge funds), managed futures and managed futures funds have tended to offer diversification opportunities that may have the potential to lower the standard deviation of returns and improve the risk-reward profile of an investment portfolio.

Returns Generation in Varying Financial Conditions

Managed futures and managed futures funds have the potential to generate attractive returns and may be suited to perform well in various economic and financial market scenarios.

Favorable Performance during Periods of Financial Market Dislocation

On several occasions during periods of substantial turmoil or stress in financial markets, investment returns for managed futures have been favorable (please refer to “Managed Futures Returns during Financial Market Dislocations” for further information).

Exposure to a Broad Spectrum of Assets and Markets

Managed futures advisers may utilize futures contracts traded on many global exchanges involving typically 75 to 100 underlying assets or indices, including equity indices, financial instruments, agricultural products, precious and nonferrous metals, currencies, and energy products, offering potential trading and investment opportunities across a broad spectrum of assets and markets.

Disciplined Quantitative Underpinning to Approach

As a heavily quantitatively and computer-driven trading strategy, m...