Managed futures strategy refers to an investment approach where a portfolio of futures contracts is actively managed by professionals. This approach falls under the umbrella of alternative investments and is frequently utilized by funds and institutional investors as a means of achieving both portfolio and market diversification.
Understanding Managed Futures
Managed futures involves the trading of futures contracts across various asset classes, such as:
- Commodities: Including agricultural products, energy, and metals.
- Currencies: Trading different currency pairs.
- Financial Instruments: Like stock indices and interest rates.
Key Features of Managed Futures
Here's a breakdown of what makes managed futures unique:
- Active Management: Unlike passive investment strategies, managed futures involve ongoing analysis and trading decisions by professionals.
- Diversification: By spreading investments across different asset classes, managed futures can offer diversification benefits.
- Alternative Investments: They are not traditional investments like stocks and bonds.
- Leverage: Managed futures often use leverage, which can amplify both gains and losses.
How Managed Futures Work
Professional money managers, often referred to as Commodity Trading Advisors (CTAs), implement managed futures strategies. They utilize various methods, including:
- Trend Following: Identifying and trading in the direction of prevailing market trends.
- Arbitrage: Taking advantage of price differences in different markets.
- Fundamental Analysis: Evaluating macroeconomic factors that influence prices.
- Technical Analysis: Using historical price patterns to predict future movements.
Why Use Managed Futures?
- Potential for Returns: Managed futures strategies can provide returns irrespective of market direction (bull or bear).
- Portfolio Diversification: These investments can help diversify an overall portfolio, potentially reducing risk.
- Hedging: Managed futures can be used to hedge against inflation or other market risks.
- Institutional Use: They are popular among institutional investors due to their diversification and potential return characteristics.
Example of a Managed Futures Strategy
Imagine a CTA that uses a trend-following strategy.
- If they observe an upward trend in the price of oil futures, they might buy those contracts to profit as the price continues to increase.
- Conversely, if they observe a downward trend in the price of a currency pair, they might sell those futures to profit as the price decreases.
In conclusion, managed futures strategy offers an approach to diversify and potentially enhance investment portfolios through actively managed futures contracts. It provides a distinct advantage by moving beyond typical investments.
