Investing in futures is a way to benefit from stock market movements without actually owning a particular security. Managed futures is considered an alternative investment strategy that can be used as a hedging tool within a portfolio. Though there are several benefits to investing in managed futures, it’s not necessarily right for everyone. If you’re thinking about adding managed futures to your portfolio, here’s what you need to know.
Managed Futures, Defined
Generally speaking, managed futures refers to investing in futures under the guidance of an active fund manager. If you work with a professional money manager, also known as a commodity trading adviser (CTA), they’ll oversee futures contract investments on your behalf. CTAs determine whether to take a long or short position in futures contracts based on the risk-and-rewards profile of the investment.
Managed-futures investing is generally classified as a hedging strategy, in that fund managers or CTAs attempt to hedge against stock market volatility to deliver the best returns possible. CTAs can use fundamental analysis or technical analysis (or a combination of the two) to decide which futures contracts to invest in at any given time.How Managed-Futures Investing Works
In managed-futures investing, the fund manager is responsible for creating a diversified portfolio of futures contracts that can cover a variety of asset classes, including:
Fund managers can take different approaches in managing the various futures contracts in a portfolio. For example, some CTAs focus on systematic trend following in which they rely on technical analysis to spot pricing trends that have the potential to yield profits. Other CTAs might use algorithms or other discretionary methods to decide what to invest in and what position to take.
Keep in mind, though, that while managed futures appear similar to mutual funds or exchange-traded funds (ETFs), they’re actually very different. Though both give you exposure to a basket of investments, managed-futures accounts are not funded with pooled money like a mutual fund or an ETF. In contrast, CTAs build portfolios based on an individual client’s preferences, needs and objectives.The Pros of Investing in Managed Futures
While investing in managed futures is a bit more complex than simply buying stocks or mutual funds, they do offer some advantages, including:
As with most things in life, it’s important to weigh the potential downsides of any venture. When it comes to investing in managed futures, that includes:
The easiest and most cost-effective way to add managed futures to your portfolio may be to do so through a managed-futures mutual fund or ETF. By investing in funds, you get access to a collection of managed-futures investments in a single vehicle. You can easily diversify without having to work directly with a fund manager to make investment decisions.
The key difference between managed-futures mutual funds and managed-futures ETFs has to do with how they’re traded. ETFs trade on an exchange just like a stock; mutual fund prices are settled once per day at the end of closing. ETFs can also be more tax-efficient, since the underlying investments typically turn over less often, meaning fewer capital gains tax events.
When evaluating managed-futures funds or ETFs, pay attention to what the fund invests in. Check the underlying investments to see which sectors are represented, then consider how that lines up with your diversification needs, risk tolerance and investment goals.
Next, consider the cost. With a mutual fund or ETF, the biggest cost to focus on is the expense ratio. Your expense ratio reflects how much you’ll pay to own the fund annually, expressed as a percentage of assets. Ideally, you want to look for funds that have lower expense ratios since this means paying less in fees.
Finally, check the fund’s performance to get a general sense of the returns it’s delivered to investors in the past. Just remember that past returns are not necessarily an indicator of future performance.The Bottom Line
Managed futures may be new territory for most everyday investors, but it’s a strategy to consider if you’re interested in diversifying your portfolio. Your best bet? Take the time to thoroughly research both the pros and cons of any new investments, including managed futures, before you take the plunge.Tips for Individual Investors
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