Understanding Futures
If you are exploring an investment in futures for the first time, you might not know all the alternatives available to you.
- Like their mutual fund counterparts, commodity future markets offer more passive means of generating income.
- Keep in mind that there are lots of options in regards to selecting a managed future program. Using global futures and options, profession money managers trade on a discretionary basis called managed futures.
- Further explanation of top managed futures etf funds can be found at http://www.emanagedfutures.com/.
- These managers use a variety of trading approaches; some rely exclusively on technical analysis to make their decisions, others, fundamental information, and others, a variety of both.
- Managed futures accounts are becoming increasingly popular with corporate, institutional and individual investors. They are becoming less of an "alternative investment" platform.
- The benefits of USA futures are clear.
The most obvious reason is the portfolio volatility generally decreases with an influx of managed futures investments. Correlation between managed futures and stock prices are virtually nil. This is crucial because correlated investments experience gains and losses together which means that only uncorrelated investments can actually properly diversify a portfolio. Nobel Prize economist Dr. H. Markowitz in his key tenets of Modern Portfolio Theory is that more efficient investment portfolios can be achieved by diversifying among assets with low correlations. A "drawdown", which is the measure between a performance high and the following low is one way measure risk. Managed futures have significantly lower drawdowns than the S&P 500®, the NASDAQ®, and the MSCI® Europe, Australasia, and Far East (EAFE®) Index .The ability to profit from falling markets is a significant difference that commodity futures trading has when compared with traditional asset classes.
Managed futures trading advisors can take advantage of price trends. They can purchase futures positions in rising markets or sell futures positions in falling markets. As a basic explanation, commodities like gold, silver, grains, and livestock tend to do well during hyper-inflationary periods.
In a declining market, futures can profit by selling or closing out a position at a lower price. Neutral markets even have their own set of nuances that can be profited from Managed futures also can be great performers on their own. The average CTA program was up 14% last year which is 51% greater than the stock market according to the Barclay CTA Index. In fact, the Barclay CTA Index has gained an annual average of 12.2% since 1980 and lost money in only three of those calendar years.
The Experts Take...
Academic research shows that commodity futures have kept pace with inflation and rivaled the returns on stocks, with the extra virtue of tending to go up whenever stocks or bonds go down.
This is substantiated by an extensive bank of academic research, beginning with the landmark study of Dr. John Lintner of Harvard University, in which he wrote that "the combined portfolios of stocks (or stocks and bonds) after including judicious investments in leveraged managed futures accounts show substantially less risk at every possible level of expected return than portfolios of stocks (or stocks and bonds) alone."
Be aware of the costs involved, however, returns are typically reported after those fees.
It's traditionally been individual investors seeking the profit opportunities of futures trading but without the responsibility and demands of day-to-day account management.
Risk and diversification are major concerns in today's market environment --- along with, of course, yield.
Investing in managed futures is not for everyone! Evaluate risks and benefits fully before making any investment choice.
