An Advisor’s Guide to Demystifying Managed Futures

In an environment of pronounced volatility and less-than-certain equity and bond performance in the last few years, investors are leaning toward more complex strategies such as alternatives. Managed futures are one such strategy, equally complex and alluring for the strong diversification they can bring to portfolios.

It’s been a tumultuous start to the decade as global markets and economies contend with pandemic, geopolitical risk, recession, inflation, and more. Last year when both equities and bonds sank, many managed futures funds soared. But why?

The Benefits of Futures

Alternatives come in many shapes and sizes, from private equity to hedge fund strategies and more. Managed futures fall into the second category as a strategy long relegated solely to hedge funds and only fairly recently made available via the ETF wrapper.

The strategy entails investing in futures contracts and the hedge fund managers of these strategies are referred to as Commodity Trading Advisors (CTAs). Futures are a derivative contract whereby assets are bought and sold at an agreed price at a specific point in the future. They trade on specific futures exchanges such as the CME and are generally fairly liquid.

Futures are often used to speculate on prices. They’re also used to hedge against future prices of any number of asset classes. Managed futures strategies invest across several asset classes, including bonds, equities, commodities, currencies, and more. They use a propriety system to do so that is at the discretion of the manager.

These strategies take long and short positions on asset classes via the futures market. Because they are trading in futures, they carry low to negative correlations to stocks and bonds.