We have all heard the adage "don't put all your eggs in one basket," and most of us have been told this in the context of investing. Surely, you wouldn't put all of your money in one stock, one mutual fund, or even one asset class. This lesson was painfully learned in 2008 when everything seemed to lose value. Stock and bond indexes were down, as were real estate, commodities and even most hedge funds. Perhaps the traditional definition of "diversification" has been too narrow. But was there a "safety net"? There was: managed futures.
Professional money managers, known as commodity trading advisors (CTAs), invest in managed futures. There are more than 1,500 registered CTAs, each with a unique managing style. Similar to mutual funds, risk varies among CTAs. Some invest very conservatively, and others more aggressively. Managed futures have been used by investment professionals for more than 30 years and now represent over $200 billion in assets. High-profile endowments, such as those at Yale and Harvard, have utilized managed futures, in part, to generate their impressive returns over the past decade.
Managed futures are often mistakenly compared to hedge funds. There are many differences, notably in their regulation and liquidity. Managed futures are highly regulated, and CTAs are required to be registered by the National Futures Association (NFA) and the Commodities Futures Trading Commission (CFTC), whereas hedge funds are generally exempt from registration. The liquidity of the investment is often misunderstood as well. Many managed futures investments can be redeemed on a monthly basis (with no fee), and are invested in the most actively traded instruments in the world: futures, foreign exchange and stocks.
In addition, managed futures can provide daily valuation and full visibility, just like a mutual fund. Many hedge funds impose "lock-up" periods, as long as two years, where you cannot access your account, since the investments within the fund may be very illiquid, and difficult to sell or even place a value on.
Why invest in managed futures? Perhaps, foremost, is the lack of correlation to traditional assets. In other words, the performance of managed futures does not necessarily track that of stocks and bonds. This has proven very favorable over the last few down years in the market. In 2008, when the S&P lost 39%, managed futures gained 14%. Further, during the 2000-2002 bear market, the Barclay CTA Index had positive returns each year. Another benefit of managed futures is the ability to achieve true global diversification. CTAs literally have the whole world in which to invest: over 150 exchanges on six continents. Managed futures have also shown remarkable resiliency during challenging economic times. During the last bout of inflation (1980-1982) the CTA Index gained over 100%. Managed futures have fared equally well during recessions. In addition to the impressive gains of 2008, in 1990 the S&P fell 7%, and the CTA Index gained 21%.
While managed futures can be risky and may not be suitable for every investor, every investor should at least consider the benefits they can offer. Investing in managed futures can be as easy as opening a regular brokerage account, and financial advisors should discuss with clients such an investment is suitable.
Bruce Greig, CFA, CAIA, CMT, is the portfolio manager for Altin Holdings LLC, an investment management firm based in Rochester, Mich. He may be reached at email@example.com.