 |
 |
|
|
|
|
|
 |
||||||
 |
||||||
 |
||||||
|
|
|
|
|
|
|
|||||
 |
 |
 |
|||||||
 |
|
||||||||
|
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
Managed Futures - FAQ’s |
|
|
|
What exactly is a managed futures account? What types of investors utilize managed futures accounts? What has been responsible for the growth in managed futures trading? Why can investment portfolio performance be improved by including Is a managed futures account appropriate as a short-term investment? Does having a managed futures account lessen the risk in futures trading? Can you give an example of "leverage"? Couldn't the trade have resulted in a loss? How does the performance of managed futures accounts compare to Has the advantage of managed futures trading been increasing in recent years, Is there a minimum investment needed to establish a managed futures account? For the individual or institutional investor who is simultaneously performance-oriented and risk-conscious, the key question is how best to achieve a higher overall rate of return with acceptable risk. The answer may be a diversified investment portfolio with some portion of the total assets invested in a managed futures account. That is, an account that utilizes the abilities of a professional Commodity Trading Advisor who's able to bring experience, discipline, and a history of past success to the trading of futures contracts. By providing plain language answers to plain language questions, the pages that follow can be helpful in deciding whether a managed futures account can help achieve specific investment goals, particularly in today's volatile and increasingly challenging investment markets. What exactly is a managed futures account? It is like any other brokerage account established to trade in futures except that responsibility for determining what trades to make and at what time, including discretionary authority to direct trading for the account, is delegated to a professional trading advisor. In this sense, the advisor is the account "manager". As will be discussed later, the advisor's compensation is normally a management fee based on the size of the account plus an incentive fee contingent on profitability. Managed Futures - Top of Managed Futures FAQ’s Page What types of investors utilize managed futures accounts? It's traditionally been individual investors seeking the profit opportunities of futures trading but without the responsibility and demands of day-to-day account management. Recently, however, growing numbers of corporate and institutional investors have been allocating some portion of their total portfolio assets to specially designed and professionally managed futures trading programs. The total amount of capital in managed futures programs is estimated to exceed $40 billion. Managed Futures - Top of Managed Futures FAQ’s Page What has been responsible for the growth in managed futures trading? A variety of things. As traditional investment markets have become increasingly volatile - and vulnerable to often-unexpected events institutional money managers and other sophisticated investors have sought to more effectively manage overall portfolio risk through diversification. Indeed, risk and diversification are major concerns in today's market environment -- along with, of course, yield. Managed Futures - Top of Managed Futures FAQ’s Page How are profitability, volatility and risk affected when managed futures are included in an investment portfolio? Harvard Business School Professor John E. Lintner found that including managed futures in a portfolio "reduces volatility while enhancing return." And that such portfolios "have substantially less risk at every possible level of return than portfolios of stocks, or stocks and bonds. For the period January 1, 1980 to December 31, 1998, data show that managed futures investments (as measured by the Barclay CTA Index) had a compound annual return of 15.8%. That compares very favorably with the 17.7% return that common stocks had during the same period, one of the strongest stock markets in U.S. history. Further, it exceeded the 11.8% compound return on bonds. Furthermore, during a similar period (Jan 1, 1980 to Dec 31, 1997), analysis showed that a portfolio that was comprised of some managed had similar profitability with far less risk. |
|
|||||||||||||||||||||||||
|
|
|
|
Managed Futures - Top of Managed Futures FAQ’s Page |
|
|
|
All things considered, why can investment portfolio performance be improved by including managed futures? There's no single reason, but high on the list is that managed futures may perform best when other investments are performing relatively poorly. On the occasions of the S&P 500's two worst declines during the past decade, managed futures recorded net profits of 9.7% and 18.6%. A study by University of Massachusetts Finance Professor Thomas Schneeweis compared the S&P's worst 12 months and best 12 months since 1985 and found that managed futures posted gains during both periods. An important advantage of futures is the opportunity they provide to respond swiftly on a highly leveraged basis whenever and wherever in the financial and commodity markets major price movements occur -- either upward or downward -- and to do so without liquidating other investment holdings or adding to overall portfolio risk. Managed Futures - Top of Managed Futures FAQ’s Page Is a managed futures account appropriate as a short-term investment? No. Futures markets, like most markets, tend to be cyclical. Moreover, even an advisor who is highly successful over the course of a year may -- and probably will -- experience some months in which losses are incurred. Thus, while you are free to close an account at any time it's probably not a prudent investment strategy to establish an account that you don't plan to maintain for at least a year. Managed Futures - Top of Managed Futures FAQ’s Page Does having a managed futures account lessen the risk in futures trading? There is no method of futures trading that doesn't involve risk. The same leverage and price movements that can produce trading profits can produce trading losses. Indeed, any loss that can occur when an individual directs his own account also can occur in a professionally managed futures account. Having said this, however, one of the things that should obviously be looked for in a trading advisor is a long-term demonstrated ability to manage risks. Managed Futures - Top of Managed Futures FAQ’s Page Can you give an example of "leverage"? If you are already familiar with the arithmetic of futures, this will be nothing new to you. Still, an example illustrates the reason for having some part of a total investment portfolio positioned to participate in profit opportunities as when there are significant price movements virtually anywhere in the economy. Example: Assume there are indications that the U.S. dollar will increase in value. Consequently, the value of a Swiss franc is expected to drop from 65.00 cents to perhaps only 60.00 cents. With a performance bond deposit of about $10,000, you could establish a short position in 6 Swiss franc futures. (Each Swiss franc futures contract equals 125,000 Swiss francs.) If the price declines by the expected 5.00 cents, the profit on the $10,000 performance bond deposit will be $37,500 (.05 x 125,000 x 6). That's leverage. Now take the example one step further and assume the $10,000 performance bond deposit was part of a $50,000 managed futures account and that you also have $150,000 in stock and bond investments with an average annual return of 12%. Even if the Swiss franc contracts represented the total net futures profit for the year, a $37,500 gain would double the overall portfolio return for the year. Yet only 5% of the total $200,000 portfolio was invested in the futures positions. In the context of portfolio management, that's the significance of leverage. Managed Futures - Top of Managed Futures FAQ’s Page Couldn't the trade have resulted in a loss? Obviously yes, if the Swiss franc futures price had risen rather than declined. For each 1.00 cent of price increase prior to the liquidation of each futures contract, there would have been a $1,250 loss per contract. Hopefully, a disciplined trading advisor would have liquidated the positions to limit the loss once it became apparent that prices were not moving in the expected direction. Managed Futures - Top of Managed Futures FAQ’s Page How does the performance of managed futures accounts compare to self-directed accounts? Some individual investors -- those who have the know-how, time, access to information, and necessary temperament -- are highly successful in directing their own futures trading. Unfortunately, however, the record suggests that only a small percentage of "do-it-yourself" futures traders possess these requisites for success. Studies indicate that somewhere between two out of three and nine out of ten lose money. However, of the 119 funds and pools in the Managed Account Reports Fund/Pool Qualified Universe Index that traded from January 1990 through October 1996, 81% were profitable over the full time period. Managed Futures - Top of Managed Futures FAQ’s Page Has the advantage of managed futures trading been increasing in recent years, and if so, why? Most industry experts agree this has been the case, due in large measure to the increasing complexity of financial markets in general and futures markets in particular. With the complexities have come additional strategies for fine-tuning risk-reward relationships, and for using futures in conjunction with a wide array of other financial products. Recently created worldwide market linkages have likewise placed a premium on the ability to quickly analyze and act on vast amounts of information. These are capabilities that professional management is generally best able to provide. For example, most successful trading advisors monitor a large number of different markets and market relationships simultaneously and continuously. This can translate into a faster response to profit opportunities and an earlier warning to retreat from unattractive market positions. Managed Futures - Top of Managed Futures FAQ’s Page Is there a minimum investment needed to establish an account? Yes, but different managed account programs have different minimums. At the least, it will be an amount the advisor and brokerage firm – given the trading approach utilized - consider adequate to achieve account diversification. Minimum account size also may be affected by whether the managed account program is designed principally to serve individual investors or institution/corporate clients. Managed Futures - Top of Managed Futures FAQ’s Page |
|
|
Futures Trading | Online Futures Trading | Forex Trading | Managed Futures | Managed Forex |
|
|
|
© Aaron Trading. All Rights Reserved. |
|
 |
|
