30 Good Reasons to Invest in Managed Futures Funds
Part 3: 21-30
- Shorter recovery times:
The Managed Futures Index (CISDM) shows that none of the off-peak periods lasted more than 28 months, which reflects managed futures funds’ ability to recover relatively quickly. In contrast, the longest recovery period for the S&P’s 500 Index lasted 303 months, or more than 25 years. Managed futures funds can turn quickly, like an agile sailing boat, whereas a huge mutual fund turns slowly, like a fully loaded cargo tanker.
Differences between Managed Futures and Hedge Funds:
- Inherent leverage offers dual profit potential:
Because leverage is built into futures trading, managed futures funds can, in general, invest approximately 20% of their assets to get 100% market participation. The rest can be invested in conservative instruments like government bonds or money markets. So assets help generate profits in two ways: as security for trading positions, and also from return on the investments in bonds or money markets. Managed futures funds have no need to borrow or use outside capital in order to achieve leverage.
- Available with a low initial investment:
Managed futures funds commonly have far lower investment minimums than hedge funds. They can be available for as little as a $5,000 initial investment. Hedge funds generally are only available to high net worth individuals that invest a minimum of $500,000 to $1 million.
- No extended lock-up period:
Unlike many hedge funds, managed futures funds can be made available with no extended lock-up period (during which an investor has no access to his money for months or sometimes even years). While managed futures are recommended as a long-term investment, specialised managed futures fund units can be redeemed on a monthly basis if desired.
- Liquid investments, priced to market:
Accurate investment valuation, or net asset value, is established with real-time market prices. Hedge funds must often use speculative valuation for less liquid investments, such as private equity, convertible bonds, or real estate. Anyone who has sold a house or a flat (condominium) recognises that pricing real estate is not an exact science! With real-time pricing, the client can see the exact value of his investment at a given time.
- Strict regulatory oversight:
Public-offered managed futures funds are strictly regulated by governmental agencies. In the U.S., their business conduct and trading activities are supervised by the Commodity Futures Trading Comission (CFTC), the National Futures Association (NFA) and by individual state regulatory agencies. The Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) regulate offerings of managed futures funds to the public. Other countries require similar regulatory oversight. Public managed futures funds are audited by independent accounting firms and follow strict disclosure requirements.
Advantages of Computerised Trading:
- Proven and tested software & trading systems:
There are more futures markets available now than ever before and electronic trading makes it easier to access them. However, sophisticated trading systems and software are required to effectively take advantage of these opportunities. Managed futures funds allow individual investors to benefit from years of knowledge and experience in tested trading systems. Computerised systems also eliminate the second-guessing and irrational moves that are common investing mistakes.
- Zero manager turnover:
Because most managed futures funds are managed by computerised systems, the manager’s role becomes minimised. Manager turnover therefore is much less of a risk than in hedge funds, where good fund managers often leave for other firms or to start their own operations. The lack of manager turnover partly explains the relatively consistent performance of many systematic trend-following funds over the years.
Advantages of Public Managed Futures Funds:
- Proven solvency:
Because of strong risk management, effective regulatory oversight and lack of borrowing, managed futures funds have shown strong solvency. Since the introduction of public managed funds in the U.S. in the 1970s, there has not been a single noteworthy blow-up; in sharp contrast, the lightly regulated hedge fund industry has witnessed some spectacular collapses. Strict sector and market limits in managed futures funds help to prevent blow-ups.
- Transparency on positions:
Managed futures funds are more transparent than most hedge funds. In the U.S., for example, public managed futures funds must disclose their positions at least every three months. With many hedge funds, investors sometimes have no idea what the managers are doing with their money for months and sometimes years.