Contact Us
Firm Overview
Why Legend Is Different
Client Types
Professional Biographies
Frequently & Rarely Asked Questions
Risk Spectrum
Investment Strategies
Second Opinion
Global Investment Pulse
Event Calendar
Press Center
Legend News
Clients Only
Career Opportunities
Newsletter Sign-up
Site Search
Site Map
Tell A Friend About This Website
Informational Booklets   
Phone: (412) 635-9210
  (888) 236-5960
Connect With Legend:
Subscribe to me on YouTube

A Primer On Managed Futures

Most financial advisors and the general public have little knowledge of managed futures as an investable asset class.  In effect, most advisors that we at Legend Financial Advisors, Inc.® (Legend®) know shrug them off and say “high fees” (a true statement) without understanding the merits of such an investment when the words “managed futures” are mentioned.
Managed futures are a sector of the investment industry in which professional money managers actively manage client assets using global futures and other derivative securities as their primary investment instruments.  Managed futures managers are also commonly known as Commodity Trading Advisors (CTAs).  CTAs are required to register with the Commodity Futures Trading Commission (CFTC).  The National Futures Association (NFA) is the self-regulatory organization by which CTAs are regulated.  Collectively as an industry, managed futures funds, which for many years were viewed skeptically at best by the financial advisory industry, did not take off as an industry until the 1980s.  In reality they have only recently begun to earn respect in the financial advisory community.  Many advisors though would still say they have not garnered such respect.
Growth in the managed futures industry has been tremendous.  Assets managed by the managed futures industry exceeded $120 billion in 2005.  The global futures markets have historically been dominated by agriculture and commodity futures.  In 1980, agricultural futures trading approximated 64% of market activity and metals trading comprised a total of 16%.  Currency and interest rate futures accounted for the remaining 20%.  Today, global futures markets are dominated by financial futures for currency, interest rates, and stock index futures.  Twenty years ago, agriculture was the predominant piece of managed futures trading.  Currently, it represents less than 10% of the total.  In fact, for many of the largest managed futures managers, agricultural futures represent even less of their portfolios.
Managed futures managers can usually be segregated into two primary categories: either the various markets (oil, currencies etc.) that they focus on, or the trading strategies they utilize.  The majority of futures managers will typically diversify across numerous markets and oftentimes trade hundreds of different types of futures contracts.  Other futures managers specialize in a specific market or a group of similar contracts.  For example, a futures manager might focus on the energy category (oil, gasoline, natural gas, diesel fuel, etc.) as opposed to just oil.  Futures managers are also grouped together by trading strategies.  The majority are trend-followers, which attempt to find trends in price movements of futures and jump on the bandwagon.  These trends could last for a few hours, days, weeks or months.  Man Investments AHL Group, a trend-following manager and currently the largest managed futures manager, re-analyzes various futures markets with their computers models over 2,000 times per day.  This is spread over a 24-hour period since they operate in a global market.  Fundamental analysis (more commonly known as discretionary trading) which is less popular relies on analysis of global supply and demand, macroeconomic indicators, and geopolitical forces, which is similar to a macro fund hedge fund manager except that the investment instruments and markets that they follow are far broader.
Trend-following approaches generally rely on quantitative models to perform technical analysis resulting in buy and sell signals.  They can be further sub-classified as either trend-following or counter trend-following.
Trend-following managed futures’ trading systems are almost always highly computerized and new models are continually created by the management team.  Futures management trading systems tend to be highly diversified across numerous markets.  Most trend-followers refrain from trying to predict trends.  Instead, they take futures positions that will profit from a continuing trend.  They constantly review a number of widespread indicators such as momentum and moving averages.  This helps the futures managers to identify the direction of a particular market.  Futures managers often use different time horizons to identify the existence of a trend.  On the other hand, counter-trend systems look for trend reversalsFutures managers that utilize a counter trend-following strategy typically rely on several technical indicators and methodologies.  These include obscurely named indicators (to most financial advisors and investors) such as rate of change indicators.  These rate of change indicators are called oscillators and momentum indicators.  Counter-trend futures management systems alternatively can use more familiar technical indicators such as head and shoulders patterns. 
Furthermore, fundamental (discretionary) managed futures managers also frequently use systematic models, which are based on fundamentals and underlying economic factors.  However, the trading decision process is determined by the manager’s thoughts regarding the models results.  Because experience and trader-specific skill are critical to the success of fundamental strategies, fundamental futures managers will often specialize in a particular sector or market.  However, some fundamental futures managers diversify across strategies by basing their trading on a mix of trend-following and fundamental methods.  These managers may or may not diversify their portfolio across numerous markets. 
There are three ways to invest in managed futures.  The first, public futures funds, in some cases offers investors the managed futures equivalent of a mutual fund.  Although this statement is somewhat exaggerated, it is not unusual for a managed futures fund to have a fairly low minimum investor criteria.  For example, a $35,000 income and a $35,000 net worth or a $100,000 net worth is not unusual.  Some public funds may require investors to be of accredited investor status.  Individuals and their spouse must jointly have in excess of $1,000,000, or if an individual, income in excess of $200,000 or $300,000 if held jointly with a spouse for each of the last two years and expect to meet that criteria in the current year.  Public funds can often be liquidated on a monthly basis.  Expenses are often higher than other managed futures opportunities.
The second way to invest in managed futures is that high net worth and institutional investors (these are either accredited or super accredited investors) can obtain exposure to managed futures through private commodity funds or pools, usually a $500,000 or higher minimum investment.  Usually the expenses are lower than a public fund.  Private funds offer diversification benefits similar to public funds.  A negative is that they often possess the characteristics of hedge funds and other private investment vehicles, with regards to limited transparency. 
The third method is that extremely high net worth investors can hire a futures manager directly.  While there are advantages to hiring a managed futures manager directly as part of a customized investment program, the cost of doing so usually requires at least a $5,000,000 or $10,000,000 minimum investment. 
Many managed futures strategies, in whatever form, when added to a mix of traditional stock and bond investments will likely add significant risk reduction and/or improved returns.  Diversification across trading styles and futures markets can significantly enhance a portfolio’s performance with regard to risk reduction and enhanced returns.
Stock and bond portfolio managers derive the bulk of their returns due to risk and return characteristics from the stock and bond markets themselves.  Managed futures managers add value primarily through their trading skills and are considered skill-based.  As a result, managed futures are considered an absolute return investment strategy.  Through their ability to invest in derivatives and to take both long and short positions, as well as invest in hundreds of different types of instruments, managed futures managers offer investors an effective way to gain exposure to investment markets and vehicles as well as investment strategies that are not otherwise easily accessed.
Should One Use Managed Futures?
As a result of Legend’s® studies over the past 18 months on managed futures, we at Legend® have found that well-diversified managed futures funds offer risks and returns comparable to diversified equity portfolios.  In fact, like equity managers, diversified managed future managers are similar in nature with regard to risk and reward levels.  On average, managed futures managers (at least the ones we have studied) have offered higher returns with less risk, and there also high reward/high risk managers as well.  In addition, managed futures historically have had low correlation with traditional stock and bond investments.  This is due to the fact that return from managed futures are frequently due to factors different from those affecting traditional stock and bond investments.  These low correlations are exactly what Legend® finds attractive from a diversification standpoint.  In fact, in our studies, which we will detail in the coming months, Legend® has generally found that most managed futures funds will either enhance return, decrease risk, or both when added to a number of Lower Volatility Portfolios.  As mentioned previously, significant risk reduction and/or enhanced returns are possible when combined with traditional mixes of stocks and bonds.
In the numerous studies that Legend’s® Investment Committee has read to date, almost all say that managed futures have the potential to provide downside protection, although losses are entirely possible, along with producing positive returns.  These studies also indicate the financial instruments used by managed futures managers are not available to stock and bond managers.  Another finding is that both managed futures managers and the stock market indices have a positive correlation in a bull market and are negative in bear markets.  This is in all likelihood due to the fact that futures managers will align their portfolios utilizing many of the broad array of investments available to them to structure their portfolios in an appropriate manner, which will take advantage of a strong upward or downward trend in the stock market. 
History has shown that managed futures also perform well in rising interest rate markets unlike bonds and stocks.  This is particularly important due to the fact that we are most likely in a long-term (secular) bear market for rising interest rates which will eventually have a negative impact on the markets for stocks and bonds. 
Several studies have also shown managed futures to have a low or even negative correlation with hedge funds and hedge funds of funds.  As a result, managed futures funds further reduce the risk in the portfolios and generally have enhanced returns as well.  Some studies have also indicated that managed futures are better diversifiers than hedge funds. 
A number of studies have indicated that the key foundation for managed futures returns, is the risk transfer function of the futures market itself.  Some commercial market participants, i.e. businesses that consume commodities and/or the suppliers themselves, by hedging, are willing to in effect pay the equivalent of an insurance premium to investors for the assumption of risk.  In total and over the long-term, futures markets tend to move in the investors’ favor, and as a result pay a net positive insurance premium.  Investors receive this premium in the form of net trading profits because they provide liquidity. 
Performance Issues:
Mutual funds as required by the Securities and Exchange Commission have disclosure requirements.  Management companies that manage a mutual fund must report their investment performance and other activities to regulatory authorities.  Managed futures managers provide performance information on their funds voluntarily to database vendors.  This voluntary reporting is somewhat suspect.  This makes accurate performance measurement and, consequently, evaluation difficult.  The two most common problems are survivorship bias and back-fill bias.
Survivorship bias, also a common problem with hedge funds, separate equity and bond accounts, as well as mutual funds typically occurs because a manager stops reporting investment performance due to poor results or closure of their fund.  As a result, the return for that group of similarly managed funds rises due to the elimination of the poor results.
Back-fill bias for futures managers, and similarly for hedge funds but not mutual funds and not since the early 1990’s by separate account bond and equity managers, occurs when managers decide to start reporting performance.  Typically, a manager begins reporting after having achieved good performance for a certain number of months thereby eliminating poor results.  Also, some managers may add in performance with back-tested results.
In reality within the managed futures and hedge fund worlds, these biases in reported performance are offset to some degree by termination biasThis type of bias is an election by successful managers who can no longer accept additional monies or investors and simply stop reporting performance to the public databases.  This is due to having reached the capacity of their investing style and is similar to small cap managers closing their funds because they have too much money to manage.
Comments on Performance Expectations:
Managed futures funds will not automatically be profitable during unfavorable periods for traditional stock and bond investments, and vice versa.  It must not be forgotten that a large part of the returns will be determined by the skills of the manager and the presence of exploitable trends in the futures markets.  If trends are non-existent or close to non-existent a la 2004, positive performance will be difficult to produce.  How non-correlated a given managed futures fund is will also vary, particularly as a result of market conditions and the manager skill set.  In some cases not all managed futures will have significantly lower correlation with stocks and bonds.  A fund-by-fund analysis will need to be made.  Some funds are quite volatile, while others have less risk but higher returns than U.S. Equities.  Nevertheless, these more conservative funds might pale in comparison to their more aggressive, sometimes highly leveraged and more volatile counterparts that provide significantly higher returns.
Concluding Thoughts:
Managed futures funds offer distinct risk and return characteristics to investors that are not easily replicated through investing in traditional stock and bond investments.  Including a modest allocation to managed futures in portfolios of virtually all types can also improve the risk-return tradeoff of long-term asset allocation portfolios even during in a bull market for stocks.  Furthermore, managed futures on average will exhibit excellent performance during periods in which most traditional asset classes under-perform, in addition to periods when interest rates are rising.
In short, investors have entered a new era for both stock and bond returns – one of low nominal rates of returns (2% to 4%) for a period of probably another ten to fifteen years.  Managed futures funds should be considered as a potential investment to enhance future returns.

  • A Guide To The New Rules On Tax Deductions In 2018
  • 2018 Estate Tax Changes And What May Be Ahead
  • You Don't Need Perfect Knowledge To Invest Well
  • What Are The 3 R's Of Roth IRAs?
  • Finding The Balance For Retirement Draw-Downs
  • Five Retirement Questions To Answer
  • Live Longer And Prosper In Your Golden Years
  • 6 Ways To Close The Retirement Gap
  • IRS Closes Valuation Loopholes
  • Passing Down IRA Assets? Clue In Family Members
  • This Type Of Trust Is A Failure
  • Grandparents Can Become Big Spenders For Their Offspring
  • Time Your Social Security Benefits For Top Results
  • Watch Out For These 7 Retirement Ups And Downs
  • Why Would Anyone Take Their RMDs Sooner?
  • 10 Frequent Retirement Mistakes You Should Avoid
  • Tax Rewards For Year-End Generosity
  • Meeting With The Family For Elder Care Planning
  • 20 Questions On Required Minimum Distributions
  • Tie The Knot For Retirement With A Spousal IRA
  • Four Retirement Planning Rules Of Thumb To Bend
  • When Will New College Grads Be Able To Retire?
  • Last Chance To File-And-Suspend Retiree Benefits
  • You Know You're Getting Old When You Get RMD Notice
  • 10 Steps To Take On The Path To Early Retirement
  • How To REALLY Get Ready For Your Retirement Years
  • Can You Skip Over The Special Tax For Generation-Skipping?
  • What Do You Think Your Life Will Be Like In Retirement?
  • Raiding A Roth Early? No Woes
  • Live Long And Prosper: Roll Out A Stretch IRA
  • Did The Devil Make You Do It? 8 Retirement Miscues
  • Ponder These 4 Reasons For Roth IRA Conversions
  • 10 Ways To Skirt A Penalty Tax On Plan Payouts
  • Why Give Securities To Charity Instead Of Cash?
  • Will You Have To Lower Your Sights In Retirement?
  • What Will $2 Million Get You In Your Retirement?
  • Figuring Out How Much You Need In Retirement
  • Should You Borrow Against A Life Insurance Policy?
  • How Will Your Retirement Distributions Be Taxed?
  • Five Ways To Plan Smarter And For The Long Haul
  • 5 Withdrawal Strategies For Retirement Savings
  • Five Ways To Plan Smarter And For The Long Haul
  • Generation X Members Have Retirement Work Cut Out For Them
  • Booted From A 401(k)? Don't Despair
  • It's Tough To Decide If You Should Retire Early
  • Saving For Retirement At All Ages
  • Which Type Of IRA Do You Prefer?
  • Owning REIT Shares Can Help Minimize Risk
  • Roundup Of New Estate Tax Changes
  • Here Are A Dozen Part-Time Jobs For Older Americans
  • Two More Important Choices For Retirement Living
  • Will Your Retirement Assets Last?
  • The Benefits Of Working With An Advisor
  • Setting Up A Roth IRA Through The ''Back Door''
  • Eight Of The Best Tax Strategies To Use In 2012
  • 10 ''Baby Steps'' To Take If You Are Newly Widowed
  • A Case Study: Retirement Planning In Your Fifties
  • Factors In Researching An Assisted Living Facility
  • New Wrinkle In Pre-59 1/2 IRA Withdrawals
  • A Case Study: Giving Wealth Away
  • Social Security's Online Benefits Estimating Tool
  • Estate Tax Exemptions Survive Longer
  • Will New Estate Tax Rules Lull You Into Inaction?
  • The Fine Art Of Planning For Collectibles
  • Five Tips To Manage Your 401(k) Wisely
  • A Comprehensive Way To Save For Your Retirement
  • Key Factors In Conducting Your 401(k) Vendor Search
  • Assessing The Damage To Pre-Retiree Financial Plans
  • Where Have Vacation-Home Prices Dropped The Most?
  • Giving Up Control Of Your Finances
  • Estate Tax Purgatory: How To Extricate Yourself
  • Cheap Thrills: 10 Ways To Enjoy Life In A Recession
  • Adjusting To The New Reality About Your Retirement
  • What Should You Spend First During Retirement?
  • Retirement Planning Does Not Stop When You Retire
  • Part-Time Job Hunting Tips for Retirees
  • Weighing The Benefits Of Investing In A Roth 401(k)
  • Keep A Leash On Part Of Your Estate
  • Pre-Retirees, Retirees Switch To Roth IRA
  • The Obama Bank Plan And The Risks It Poses
  • New Law Suspends RMDs For Just One Year
  • The Importance Of Year-Round Tax Planning
  • Charitable Giving Rules Changed By Pension Act
  • Market Gyrations Raise Questions For Pre-Retirees
  • Passing More Than Money To Your Heirs
  • How Many Years Should You Retain Your Tax Records?
  • Key Questions For Those Nearing Retirement
  • Retirement Planning Does Not Stop When You Retire
  • Dealing With Market Risk Right After Retirement
  • Nine Estate Planning Mistakes To Avoid
  • Family Foundation Lets You Do Good For Others And Yourself
  • Treating Your Retirement As A Liability
  • Beware Of Social Security Identity Theft
  • Regulatory Guidelines Update
  • Understanding the Importance of a Fiduciary Standard
  • Don't Forget About Roth 401(k)
  • Free Credit Reports Available Online
  • Energy Systems Scale and Timeline
  • The Oil Patch Profit Squeeze
  • Timber As A Liquid Investment
  • Timber Facts
  • Ethanol: Salvation or Panacea?
  • Timber Facts
  • Emerging Market Food Consumption Growth Equals Rising Prices
  • Bank Loan Funds - A Primer
  • A Primer On Managed Futures
  • REITS: A Very Good Portfolio Diversifier, But Should You Invest In Them?
  • Does Investing Internationally Still Diversify Your Portfolio?
  • Another Way To View The Current Valuation Of REIT Sector
  • Understanding Risk-Preparing For The Unseen
  • A Critical View Of The Consumer Price Index
  • What Is Shorting Expense?
  • How Dangerous Is A Dollar Crash?
  • How Volatile Can The Stock Market Be?
  • GMO 7-Year Asset Class Return Forecast Is Bleak
  • Too Many ''Phish'' In The Sea
  • The Case For Industrial Metals
  • Identity Theft In The New Year
  • Ways To Improve The Score
  • Know The Score
  • Total Credit Market Debt (All Sectors) As % Of U.S. GDP
  • To Reinvest Or Not To Reinvest
  • Why Not Alternative Fixed Income Investments?
  • Just How Expensive Is The Market?
  • Beware of Brokerage Firms' Misconduct
  • Identity Theft : Correct Those Credit Reporting Errors
  • Risk-Controlled Investing
  • Q & A With Robert Arnott
  • Identity Theft : Applying For Credit? Better Check Your Credit Report First
  • Indentity Theft: Help Is On Its Way
  • Identity Theft: Everyday Prevention
  • Indentity Theft: Tips to Protect Yourself
  • Identity Theft : Tips to Protect Yourself
  • Identity Theft: A Note About Social Security Numbers
  • Identity Theft: Which Documents Should You Shred or Store?
  • Identity Theft : Don't Fall For That E-Mail!
  • Identity Theft : One More Reason To Protect Your Credit
  • What Do Rising Interest Rates Mean For Money Market Yields?
  • Exit Gracefully: How Business Owners Should Plan For A Comfortable Retirement
  • Section 529 Plans Are Popular But Not The Only Way To Go
  • The Importance Of Commodities In A Portfolio
  • A Tale Of Two Hedges
  • Bank Loan Funds: A Great Fixed Income Investment As Interest Rates Rise
  • REITs: A Great Diversification Investment
  • What Is Risk?
  • How To Find A Great Financial Advisor?
  • Is It Time To Find A New Financial Advisor?
  • Year-End Tax Planning Can Help Generate High Return On Investment
  • 4 Steps To A More Secure Investment Portfolio For Your Retirement
  • Traditional Investing May Decrease Your Retirement Lifestyle
  • Is Your 401(k) Plan A Failure?
  • Understanding Deflation
  • Tax Issues To Consider When Buying A Long-Term-Care Policy
  • Evaluating The Quality Of A Company's Earnings
  • Investing In Times Of Uncertainty And Risk: The Importance Of Diversification
  • Yesterday's Great Companies
  • A Retirement Plan Primer After The 2001 Tax Act
  • Beware Of Common Home Repair Scams
  • Estate Taxes To Be Reduced Then Repealed In 2010
  • Faulty IRA Conversions Can Lead To Tax Penalties
  • Many Individuals Pay Private Mortgage Insurance Beyond When It Is Necessary
  • Rethinking Estate Planning
  • Early Retirement Incentives For Tenured Faculty Waives Fica Tax Payment
  • Retirement Plan Contribution Limit Changes
  • Shopping For A Bank Account That Pays The Highest Possible Rate Of Interest
  • Your Medical File Report May Need A Check-Up
  • Do It Yourself Tax Preparers Watch Out: Tax Answers From IRS Centers Oftentimes Are Incorrect And/Or Insufficient
  • Five Tips For Preventing Thefts From Your Checking Account
  • Home Office Deductions: Hoops To Jump Through
  • Income Tax Effect On Single And Married Taxpayers
  • Income Tax Planning For Investments
  • Property Tax Challenges Should Not Be Overlooked
  • The IRS Will Follow Your Wealth To The Ends Of The Earth
  • Under New Law Taking Social Security at 65 Makes Sense for Most
  • When Do You Need Life Insurance
  • Year-End Tax Defferal Planning

  • ©2018 Legend Financial Advisors, Inc.®. All rights reserved.