The constant chase for performance keeps investors jumping from one hot opportunity to the next. But this investment strategy almost guarantees that little money will be made in a risky game of investment hot potato.
Emerging markets, foreign exchange and domestic equity are the current investments du jour. While many investors were favoring alternatives such as hedge funds and managed futures a few years ago, a 90% run from the bottom of the S&P, combined with triple-digit growth in some third-world countries have traders stumbling over each other to take advantage.
While these movements were fantastic opportunities, we may be nearing a top in both domestic equity markets and entering a cooling phase of overheated emerging economies.
Judicious and successful investing comes from recognizing both an opportunity, as well as evaluating and quantifying the risk associated with the investment. Strong risk management is key to freeing yourself from the perpetual game of hot potato. Diversified portfolios utilizing truly non-correlated instruments is essential to long term success.
The mistake some folks make when designing and executing a portfolio strategy is that they do not consider sufficiently long time frames while evaluating correlations among assets. A balanced and diversified portfolio will hold investments that will be losing from time to time. You cannot discount or throw out a quality investment because it does not make money in ALL conditions.
All weather investments do not exist.
Case in point, managed futures or commodity trading advisor (CTA) programs have done exceptionally well over the last 30 years. They have offered investors non-correlated performance, as well as some significant dis-similar return performance, during times that traditional investments have experienced difficulty. 2008 was a breakout year for the asset class, a time when it outperformed all others and was one of only two positive investment for the year.
Fast forward to 2011. Equity and fixed-income pundits have proclaimed the death of Modern Portfolio Theory along with the need to diversify into absolute return strategies like managed futures. While the previous two years have been a challenging environment for professional futures traders, it does not discount their value to a portfolio.
Managed futures, in the form of segregated commodity trading advisor accounts, offer some of the most beneficial advantages of any structured investment product. Absolute return strategies, unprecedented account transparency, and near instant liquidity are just a few.
In today's climate, investors must take into account solvency and liquidity risk when assessing any investment. These are avoidable risks that can be completely eliminated be choosing the appropriate account structure.
Managed futures are also one of the easiest ways for investors to gain access to global markets, interest-rate spreads, foreign currencies and raw commodities. Strategies used by commodity trading advisors are diverse and complex, but are designed to profit in inflationary and deflationary environments. The goal of the absolute return methodology is to perform positive, irrespective of the underlying asset's value.
Food inflation, currency volatility and rising energy markets can produce strong trends of which certain commodity trading advisors can take advantage.
And while there is no guarantee of positive performance, the opportunity exist for continuation of superior risk adjust return. A quick look into past performance, though not necessary indicative of futures results, proves to investors the worth of managed futures as part of a well balanced portfolio.
That's why you must carefully evaluate your current investment allocations to determine if managed futures are the right fit for your overall portfolio goals.
Sean McGillivray is vice president and head of asset allocation for Great Pacific Wealth Management and president of Great Pacific Capital Management, a registered commodity trading advisor. Find more info at www.gptc.com.