30 Good Reasons to invest in Managed Futures Funds
Part 1 – 1-10
- A proven long-term investment:
Historically, over the long-term, established managed futures funds have provided above-average returns, outperforming both stocks and bonds. Some USA-managed futures have produced average annual returns of between 17-20% for more than 30 years.
- No correlation to traditional asset classes:
Sophisticated investors use managed futures funds as a separate asset class. They cover more than 100 different financial and commodity markets, ranging from gold and oil to currencies and stock indices. Managed future funds have virtually no long-term correlation to most traditional asset classes like equities, bonds, real estate and hedge funds.
- Non-correlation within the fund:
The more than 100 different markets available for managed futures funds react differently in different situations. A rainy summer in India might make some commodity markets go up, and some go down. Diversification across a wide range of markets increases the chances of creating profits and in protecting an overall portfolio. Since correlation between markets is low, risk can be limited.
- Profits in ‘up’ or ‘down’ markets:
Managed futures funds are able to make money from market movements in both directions, whether they are going ‘up’ or ‘down’. They have the flexibility to make money by anticipating the continuing fall in a future price, and will then buy ‘short’. Most traditional mutual funds face severe restrictions against taking short positions in market downturns.
- Broad diversification means more opportunities:
Although there are a great number of different hedge fund styles, it would be hard to find one that offers the broad diversifications of a managed futures fund. Many hedge fund styles limit their investing solely to the equity markets, while others invest, for example, only in real estate or in one single geographical region. By contrast, managed futures funds invest in more than 100 futures markets on exchanges around the world. These markets include gold, crude oil and wheat, as well as financial futures on currencies, interest rates and equity indices, just to mention a few.
- Compounding enhances returns:
Certain investments earn you interest on your capital. The following year you earn interest on both the original capital and also on the interest from the first year, which boosts your performance overall. So if the return on your capital is 20% annually for five years, your total return is not 100%, but 150%, because of the compounding interest effect. This is also the way managed futures funds operate.
- The ability to wait for opportunities:
Most managed futures funds using ‘trend following strategies’ invest only if a good opportunity arises. Mutual funds on the other hand are usually required to be invested in the markets to some degree at all times and need to wait out downward corrections to the end. A managed futures fund is in some respects akin to a lion in the wild, which will only start hunting if the prey is close by and his chances to succeed without expending too much energy are very high. If, after a short time it can’t catch the prey, it will pull out quickly to conserve energy for the next future hunt.
- Risk management is a priority:
To achieve superior long-term performance, managed futures fund managers take a professional and disciplined approach to risk. Limits are placed on the size of each new trading position (a maximum of 2% of the fund’s total assets) and predetermined stop-loss orders are used to control the overall risk taken on by a fund.
- Stability during uncertain times:
Since managed futures are historically not correlated to most traditional asset classes, they can give you better performance just when your portfolio needs it the most. The funds generally do well during adverse economic or market conditions for stocks and bonds. With their ability to go ‘long’ and ‘short’, the funds have the means to profit from geopolitical disruptions. In today’s world, a portfolio should be able to accommodate unpredictable events.
- A track record with large institutions:
For decades, the most respected banks, pension funds and endowments have used managed futures funds in their portfolios. Large banks, like Chase and Citibank have been offering managed futures products to their high net worth clients for years, a testament to their value. Now this strategy is available to retail investors.
(TO BE CONTINUED)