What Are Managed Futures?

Managed futures are a type of investment that allows investors to gain exposure to various asset classes, including commodities, currencies, and financial instruments. In this article, we will explore what managed futures are, how they work, and why investors may consider adding them to their portfolio.

• What Are Managed Futures?

Managed futures are professionally managed investment vehicles that use futures contracts to gain exposure to various asset classes. Futures contracts are agreements between two parties to buy or sell an underlying asset at a specified price and time in the future. Managed futures funds typically invest in a diversified portfolio of futures contracts, with the goal of generating positive returns regardless of market conditions.

• How Do Managed Futures Work?

Managed futures funds are typically run by professional money managers who have experience trading futures contracts. These managers use a variety of strategies to identify opportunities in the futures markets, including trend-following, mean reversion, and discretionary trading.

In a trend-following strategy, the manager identifies trends in the futures markets and seeks to profit from those trends by entering into long or short positions in futures contracts. For example, if the manager identifies an uptrend in the price of gold, they may enter into a long position in gold futures contracts in the hopes of profiting from further price increases.

In a mean reversion strategy, the manager looks for assets that are priced above or below their long-term average and seeks to profit from the expectation that prices will revert to their mean. For example, if the manager believes that the price of oil is currently overvalued, they may enter into a short position in oil futures contracts in the hopes of profiting from a price decline.

In a discretionary trading strategy, the manager uses their experience and judgment to identify opportunities in the futures markets. This may involve analyzing technical indicators, reading news and research reports, and using other tools to make informed decisions about when to buy or sell futures contracts.

• Why Invest in Managed Futures?

There are several reasons why investors may consider adding managed futures to their portfolio, including:

1. Diversification – Managed futures funds provide exposure to a wide range of asset classes, including commodities, currencies, and financial instruments. This can help to diversify an investor’s portfolio and reduce overall risk.
2. Potential for Positive Returns – Managed futures funds are designed to generate positive returns regardless of market conditions. This means that they may be able to generate returns even when other parts of the market are struggling.
3. Professional Management – Managed futures funds are run by professional money managers who have experience trading futures contracts. This means that investors can benefit from the expertise of these managers without having to actively trade themselves.
4. Potential for Hedging – Futures contracts can be used to hedge against potential losses in other areas of an investor’s portfolio. For example, if an investor holds a large position in stocks and is concerned about a market downturn, they may use managed futures to hedge against potential losses.
5. Liquidity – Futures markets are generally highly liquid, meaning that investors can buy and sell futures contracts quickly and easily.

• Risks of Investing in Managed Futures

Like any investment, there are risks associated with investing in managed futures. Some of the most common risks include:

1. Market Risk – Futures markets can be volatile, and prices can fluctuate rapidly. This means that managed futures funds can experience significant losses during periods of market volatility.
2. Leverage Risk – Futures contracts require only a small initial investment, which means that investors can control a large amount of assets with relatively little capital. However, this also means that losses can be magnified if the market moves against the investor.
3. Counterparty Risk – Futures contracts are agreements between two parties, and there is a risk that one party may not fulfill their obligations under the contract.
4. Manager Risk – The performance of a managed futures fund is largely dependent on the skill and experience of the fund’s manager. If the manager makes poor investment decisions or fails to adapt to changing market conditions, the fund’s performance may suffer.

  Conclusion

Managed futures are a type of investment that allows investors to gain exposure to various asset classes using futures contracts. Managed futures funds are run by professional money managers who use a variety of strategies to identify opportunities in the futures markets. Investors may consider adding managed futures to their portfolio for diversification, potential positive returns, professional management, hedging, and liquidity. However, there are also risks associated with investing in managed futures, including market risk, leverage risk, counterparty risk, and manager risk. As with any investment, investors should carefully consider these risks before investing in managed futures.