FACTOID: The growth of money flowing into managed futures over the past several decades has been truly spectacular. Managed futures had less than $10 million in Assets Under Management (AUM) in 1980. By mid-2017 however, AUM reached $343 billion.
Since the advent of investing, participants have always faced a dilemma: where, among the many asset classes, should an investor allocate their money. Layered on top of this important question are additional challenges facing the investor, like where to find global diversification, liquidity, non-correlation, transparency, and long and short strategies. Very few investments encompass all of these features, illustrated in figure 1 below. But managed futures satisfy many, if not all, of the prerequisites an investor needs.
Managed futures allow investment in nearly every asset class (private equity being the lone exception). Their globally diversified, liquid markets are non-correlated, highly regulated and transparent. Furthermore, futures are the easiest way to enact long/short strategies in many markets. These hallmarks provide compelling evidence for investing in managed futures.
So why has so much money flowed into Managed futures? What are investors finding so compelling?
Managed futures are an alternative asset class (say they are a strategy) that has achieved good performance in bull and bear markets. CTAs can combine professional management with a diverse portfolio of futures contracts to gain alpha.
Managed futures exhibit low correlation to traditional assets such as stocks, bonds and real estate. When stocks or bonds head one direction, managed futures will often go a different direction. Managed futures allow exposure to markets that you cannot traditionally gain exposure to in the stock, bond or real estate markets, commodities are a primary example of this.
Managed futures and commodities, when used in conjunction with other traditional asset classes, may reduce risk and potentially increase returns.
Managed futures provide returns in any economic environment and show strong performance during stock market declines. Managed futures may generate returns in bull and bear markets, boosting long-term track records despite economic downturns. Moreover, since managed futures portfolio managers (CTAs) can go long and short in all types of markets globally, they often do well in down markets due to short selling or options strategies.
Pension plan sponsors, endowments and foundations have long used managed futures and have increased their allocations to the strategy significantly in recent years to help generate returns.
There are hundreds of liquid futures products across the globe in interest rates, stock indexes, FX and commodities. A large portfolio of managed futures positions can be easily established or liquidated in moments if necessary.
You can choose from traditional, separately managed accounts from a CTA, managed futures mutual funds distributed through major brokerage firms as well as Exchange Traded Funds (ETF) that replicate managed futures strategies.
The CFTC and the NFA are the two major regulatory agencies involved in keeping the managed futures industry credible and trustworthy.
CME Group and other exchanges around the globe practice sophisticated risk management protocols at their clearing houses to ensure the integrity of the futures markets on which CTAs trade. CME Clearing, our clearing houses attempts to ensure the performance of each and every contract on our exchanges and has done so for over 100 years.
As we pointed out earlier, growth has now reached $343 billion in AUM up from under $10 in 1980.