Proponents of managed futures say the asset class can dampen portfolio volatility by providing a broad range of vehicles with a low to slightly negative correlation to stocks and bonds. They also tout the ability of managed futures to profit in any market environment through long and short strategies.

For example, managed futures as a whole gained 15% in 2008, led by managers who invested in global macro, sovereign debt and currencies strategies. On the flip side, the collective managed futures asset class lost 8% last year as equities zoomed after early March.
With managed futures (and alternative investments in general), it's more about looking at the Sharpe ratio and risk-adjusted returns than it is about getting the highest returns. Still, by at least one measure the long-term returns on managed futures have been impressive.

A graph presented during the session showed that from January 1990 through May 2010, the CISDM CTA Equal Weighted index of managed futures turned in the best performance vis-à-vis the S&P 500 Total Return, S&P Goldman Sachs Commodity and NAREIT indexes.

Still, a bet on managed futures is a bet on the skill of the CTA who's calling the shots. For financial advisors not well versed in this area, that means doing significant due diligence on CTAs. Or, more likely, relying on companies who put together managed future programs using their own due diligence on CTAs.

"There are about 300 different trading programs out there, and within that number are the good, the bad and the ugly," said Ken Steben, president and CEO of Steben & Co., a Rockville, Md.-based company specializing in managed futures. "The single most important thing investors in managed futures can do is to select the right manager."

That, or investors can just go with one of the growing number of '40 Act funds that package managed futures-or other alternative or hedge-fund-like strategies-into tidy mutual fund or exchange-traded formats with daily pricing, greater liquidity and easier tax reporting. These funds don't have the huge investment minimums or hefty fees associated with CTAs or hedge fund managers.

The number of '40 Act funds with an alternative bent have grown considerably in recent years, but many don't have long track records and some people consider them to be "hedge fund lite" investment vehicles. "They're not quite a true hedge fund," said Cleo Chang, vice president at Wilshire Associates in Santa Monica, Calif., because there are restrictions on leverage and limits on the amount of derivatives and illiquid securities these funds can employ. It might make them less volatile, but it also reduces the attributes that can juice returns on certain alternative investments.

One asset class where the illiquidity premium plays a big role is private equity. "Private equity has gotten a bad rap the past couple of years," said Robert Worthington, president of Hatteras Funds, a Raleigh, N.C.-based company that runs a couple of private equity-dedicated funds of funds, as well as a venture capital fund. He noted that based on the Cambridge Associates Private Equity index, private equity has outperformed the public markets by 7% to 9% a year on average during the past three-, five- and ten-year periods.
Worthington believes the best private equity opportunities are in Asia, where growing economies and potentially massive population shifts from lower- to middle-class status are fueling growth and presenting enticing investment opportunities.

"That's growth capital," Worthington said, adding it's different from what's been happening in the U.S. and Europe, where private equity has been fueled mainly by leveraged buyouts. Money going into Asia, he said, helps growing companies get bigger. And expanding IPO markets in China and India provide investors with an exit strategy on their investments.

"It's not without risk, but China and India and emerging Asia are where the U.S. was 35 years ago," he said.