30 Good Reasons to invest in Managed Futures Funds
Part 2: 11-20
- Partners Increase transactional Security:
Managed futures funds trade on exchanges that are cleared through reputable clearing firms, making transactions very secure. Like someone offering you insurance on your house, using the clearing firms guards against the risk that an investor will default on their contractual obligations in the markets.
- Takes advantage of mass psychology:
Many managed futures funds use trend-following strategies which take full advantage of a basic human trait: the herd instinct. Children imitate their parents in order to learn how to talk, walk and behave. In the same way, adults naturally imitate other people and follow the crowd, whether it be fashion or finance. Consider that a movie star wears a new jacket and the next month it is adopted by people worldwide. History shows that mass psychology is unlikely to change and therefore trend-following is a robust strategy.
- Let your profits run:
Unlike traditional or fundamental fund managers, trend-following strategies do not draw profits before the end of a trend. Free from profit-taking pressure, the systems are free to ride trends that can make more than 100% returns. When the trend changes direction, a stop-loss comes into action to close the position and secure any profits.
- Expert trading methods, applied with discipline:
Many managed futures trading systems are based on unique, propriety software that is developed using mathematical formulas and scientific logic and can be back-tested to see how they would have performed over time. The people behind these systems are mathematical economists. The trading methods they devise are applied with strict discipline by automated systems.
- Sticking with the game plan:
Attempting to change an investment strategy each time the environment shifts can be inefficient. The environment is always changing. Trend-following managed futures funds can rely on their systems for discipline in any market condition. Thus, they can have one “game plan” for all futures markets in any environment and stay with it.
- No prediction, only reactions to real events:
With equity or hedge fund investing, analysts try to predict where the market is headed and attempt to pick winners based on fundamental or analyst opinions. Managed futures funds, on the other hand, react to real events in the financial and commodity markets as they happen. Trading decisions are based on current and past market price movements. These funds seek out existing trends and ride them out.
- Rapid reaction using margin investment:
A mutual fund portfolio manager may first have to sell out of one investment before buying into another. Since futures contracts require only a smaller “margin” position, managed futures fund managers can take positions as soon as trends form, without being required to sell other assets to purchase the new positions.
- No margin calls for investors:
With managed futures funds there are no margin calls to fund investors. You won’t be asked to come up with additional money to cover trading, as you could be if you have a managed account at a brokerage firm.
19: Maximum flexibility:
Because managed futures funds can invest in over 100 financial and commodity markets, they are not restricted to any single market. In contrast, most mutual funds and certain hedge funds have a dedicated market or strategy portfolio that managers must stick with – small caps or global macro strategies, for example – even when there may be no market opportunities.
- Limited drawdowns:
A drawdown is the reduction a fund might see in account equity during a market retrenchment. Most systematic trend followers adhere to strict stop-loss limits (which specify a pre-set price at which to exit a position), designed to control their drawdowns. Compare this to drawdowns for mutual funds that cannot use short trading to take advantage of falling markets. Many have experienced 40% to 90% drawdowns to bear markets.